Visa Earnings: Can the Card Giant Grow Fast Enough?

Visa (V -0.59%) will release its quarterly report on Thursday, and investors expect the card-network giant's revenue and earnings to keep growing at an impressive rate. The huge opportunity in the card space seems to offer enough potential for Visa, MasterCard (MA 0.15%), American Express (AXP 6.22%), and Discover Financial (DFS 0.87%) to support their respective networks, but investors expect Visa to deliver even more in sustaining its leadership role in the industry.

Having been a member of the Dow for only a matter of months, Visa has vaulted to the top of the scale when it comes to influence in the benchmark average. On its face, the company seems to mint risk-free profits, avoiding the credit risk that American Express and Discover bear by collecting transaction-based fees while having card-issuing banks handle the credit aspect of the business. Yet with so many companies trying to get into the business, including not only traditional card rivals but also tech companies and other electronic-payments specialists, can Visa defend its turf? Let's take an early look at what's been happening with Visa over the past quarter and what we're likely to see in its report.

Source: Visa.

Stats on Visa

Source: Yahoo! Finance.

Just how fast can Visa earnings grow?
In recent months, analysts have gotten just a bit less optimistic about Visa earnings, cutting estimates for the quarter ended in December by $0.02 per share and full-year fiscal 2014 projections by $0.03 per share. The stock has kept rising, though, with gains of 8% since late October.

Visa's most recent quarterly report disappointed investors, with mixed results that showed some of the headwinds the company has faced. Generally accepted accounting principles net income fell 28%, although adjusted earnings rose 15% from year-ago levels. Payment volumes had impressive growth of about 13%, and double-digit percentage gains from data processing and international transactions helped drive sales higher by 8%. Yet investors weren't satisfied, pushing shares of the card company down sharply on the report.

By all accounts, though, Visa is delivering on business fundamentals. Even given its size, Visa continues to produce strong growth, and margins are steadily improving year in and year out. Although the stock has a relatively small dividend yield, Visa has been raising its payouts and also implementing massive stock buybacks to boost shareholder value.

Yet one huge problem that Visa faces is a crisis in confidence over credit and debit cards after the hacking debacle at Target, which affected tens of millions of cardholders. In some ways, the episode emphasized the value of credit cards, with their fraud protections that prevented cardholders from actually suffering direct financial loss as a result of the incident. Yet amid controversies over whether Target didn't respond to warnings from Visa about potential malware attacks, the negative press that credit cards are getting could weigh on Visa's business, at least in the short run.

One piece of good news for Visa came last month, when it and MasterCard settled ongoing litigation over interchange fees. Not all of the original plaintiffs agreed to the deal, but the $5.7 billion settlement will allow both card networks to put much of the potential liability behind them. With Target and other major retailers having chosen to opt out of the settlement, though, Visa could still face a legal battle that could stretch well into the future.

In the Visa earnings report, watch to see whether the company is able to keep up with the growth that MasterCard, American Express, and Discover show. Barring a nasty surprise, though, Visa appears poised to keep delivering the results that investors have come to expect from the card giant.

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