Visa (V) Breaking Out

First, here is a snapshot from Credit Suisse when Visa reported earnings last time:



"Visa reported fiscal 1Q EPS of $1.02 (CS: $0.90, Cons: $0.91). The difference relative to our estimate was $0.05 in stronger revenues, $0.06 in better operating expenses, and $0.01 in a lower tax rate. Half the operating expense differential related to a one-time gain. Overall, the quarter showed more revenue growth acceleration than we had projected, leading to a superior operating margin. Management also updated its 2010 objectives to reflect higher revenue growth and operating margin expectations and a lower full year tax rate. We view management’s guidance as conservative since it does not assume the trends over the past two months persist.


Reiterate Outperform rating. Following the strength in the quarter, management’s outlook, and accelerating payment and cross-borders trends, we are raising our 2010 and 2011 EPS estimates to $3.80 and $4.60 (old: $3.50 and $4.25). Our target price increases to $100 (old: $88), implying 25x the next-twelve-months earnings.

Acceleration in payments volume. In the September quarter, payments volume totaled $720Bn, a 2.7% increase from a year ago (+2.5% Fx adjusted), a 440 bp acceleration from June. Visa also provided December quarter statistics -- payments volume grew 13.8% year/year (8.5% Fx adjusted). In the US, both debit and credit rebounded nicely. Outside the US, all geographies with the exception of Canada posted positive year/year trends on a local currency basis. Through January 28, US payments volumes grew 10% year/year, mostly in line with the month of December and 300bps faster than the quarter. Additionally, as discussed below, crossborder
accelerated 700 bps in January from the December quarter level."


On a technical note, after a long consolidation between $80 and $90, the stock is finally breaking out from the range and I believe the momentum could carry it all the way to $100 before going back into a range-bound trading and more consolidation.

I like the following June/April calendar spread:

- Buy to open June $95 calls
- Sell to open April $95 calls

I just filled the order for $1.60 debit.  I plan to take profits if the stock goes to $95 by April expiration.  If it doesn't, we'll have another opportunity to convert into May/June calendar and then eventually into June 95/100 call spread. Note that buying June calls also help because earnings are not expected until late April.  As such, I expect June IV to slowly rise as we get closer to earnings helping the spread.

Good luck!