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Shares of Visa (NYSE: V ) hit a 52-week high yet again on Friday. Let's take a look at how it got there and see if clear skies are still in the forecast.
How it got here
Whether global growth is growing or slowing, Visa and its rival MasterCard (NYSE: MA ) seem relatively unaffected.
Both companies share the unique trait of being able to process credit transactions without actually lending money. This means that both Visa and MasterCard have zero default liability and thus the potential for bigger profits as opposed to American Express (NYSE: AXP ) and Discover Financial Services (NYSE: DFS ) which, in addition to credit processing, do offer loans to consumers.
For all four of these major processors, focusing on emerging market transaction and dollar volume growth, as well as furthering their involvement in prepaid debit and gift cards has fueled results.
Many emerging markets react independently of global economic conditions, giving Visa an opportunity to fuel growth even when larger nations are seeing GDP growth stagnate. In addition, with numerous consumers' credit ratings hurt by the credit crisis and the housing bubble, the demand for prepaid credit cards has skyrocketed. Taking a cut of each deposit, Visa and its peers are able to offer these consumers the convenience of using a debit card while also adding to their bottom line.
In Visa's fourth-quarter report, released earlier this week, it just about doubled its net income to $1.7 billion from $880 million the year prior, as revenue rose 15% to $2.73 billion.
What could derail Visa
Can anything derail Visa might be the more appropriate question! If I dig deep, I can find a few potential flaws.
First, U.S. regulators can easily put a damper on Visa, MasterCard, and other debit card and prepaid card providers by capping their charges. In fact, U.S. regulators have already done this once, and it's quite possible that even broader regulation may be in order for the prepaid card industry – if not for fees, then for consumer protections (i.e., fraud protection) that are afforded to credit card customers, but not many prepaid debit card holders at the moment.
It might seem fleeting to assume that Visa has anything to worry about from large money center banks, but JPMorgan Chase (NYSE: JPM ) made it clear in May that it plans to enter the prepaid debit card market. Visa has been able to wield its weight over smaller peers in the sector like NetSpend Holdings and Green Dot, but it'll have a much harder time competing against big banks like JPMorgan Chase and any others that choose to join the fray.
Now for the $64,000 question: What's next for Visa? That question depends on its ability to grow in emerging markets and domestically, while successfully fending off its peers and avoiding be harmed by U.S. regulations.
Our very own CAPS community gives the company a four-star rating (out of five), with a whopping 94.8% of members expecting it to outperform. As you can rightly sense from my optimism on Visa, I've made a CAPScall of outperform on the company that is currently higher by 24 points.
This is one of a rare class of companies that has everything going for it at the moment. Emerging market growth is robust, boosting its results, and consumers are using credit and prepaid debit cards in increasing numbers. Visa's brand name and results have been so strong that it's even been able to use promotional pricing in order to lure in new merchants. There doesn't seem to be anything that will slow down Visa's growth over the next decade short of a crippling global recession.
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