Revenue driven beat
Visa Inc (NYSE:V) is the world’s leading card issuer and card network company. It has been the source of some of the best innovations in the payments industry. It once again surprised investors and analysts. The company reported both metrics above consensus estimates. On revenue of $3 billion, the company reported earnings per share (EPS) of $1.88. Each was 4% ahead of the respective estimate.
Profits surged 17% for Visa Inc (NYSE:V), and strength in revenue was seen in data processing and international transaction fees. Operating expenses were marginally lower than expected. Processed transactions grew 14%, while payments volume remained healthy at 11% growth. July growth remained a bit slower, which management attributed to the Ramadan holidays.
Looking at the favorable trends, I believe the future is bright for this leading payments industry player. Management also increased its guidance for the rest of the year. Going forward, Visa Inc (NYSE:V)’s investors should keep an eye on the level of share repurchases, as a greater level of share repurchases, coupled with margin expansion, lower level of incentives, and a higher data processing net revenue yield could lead the stock upwards.
Tax rate driven beat
American Express Company (NYSE:AXP) is another payments industry player that reported its performance for the second quarter. Besides offering charge and credit card payment products, American Express Company (NYSE:AXP) offers travel-related products to its customers. It reported EPS of $1.27, which was $0.05 per share ahead of the estimate on revenue of $8.24 billion, which remained $80 million behind expectation. Much of the bottom line beat was driven by a lower tax rate (30% actual vs. 33% estimated) and better expense management.
The reported revenue for the second quarter surged 4% over the prior year, largely due to higher net interest income. Discount revenue surged 6%, with 7% year over year growth in global billed business. Operating expenses were moderately above the prior year, but below expectations. While salaries and benefits remained flat, much of the improvement compared to expectations was due to other expenses.
Overall, revenue growth was weak in the most recent quarter and the future isn’t very bright as well. So, the company will need to spend more if it needs to grow its revenue. Apart from increased spending, American Express Company (NYSE:AXP) investors must keep an eye on the credit conditions as unemployment rises and the legal and regulatory risk involved in the credit card business, including the Department of Justice suit. Among other headwinds for American Express Company (NYSE:AXP) is the European Union cap on interchange rates. It could affect the company’s Global Network Services business. If the aforementioned factors come into play, you should expect a decline in the billed business, which can bring the stock price down.
Revenue and lower credit cost driven beat
Following the trend, Discover Financial Services (NYSE:DFS) also reported better-than-expected bottom line of $1.20 per share. Besides operating as a payments industry player, Discover Financial Services (NYSE:DFS) is also classified as a bank holding company. Better-than-expected revenue and lower expenses led to this earnings beat.
Driven by higher net interest income and fee income, revenue for the second quarter was 9% above the prior year levels. Net discount interchangeable revenue was 13% up from a year ago. Operating expense was 3% higher from the prior year levels, still it was lower than expected. At the same time, credit quality remained solid.
Since Discover Financial Services (NYSE:DFS) is also classified as a bank holding company, it’s worth noting the growth in its loans and spending. The company was able to grow its total loans 2% over the prior quarter and 6% over the prior year. Much of the increase occurred in its personal loans, while proprietary spending growth accelerated 30 bps over the prior quarter.
The future is bright for Discover Financial Services (NYSE:DFS) and I see continued earnings growth. Discover Financial Services (NYSE:DFS) continues to take market share and report sector leading card growth. Therefore, I believe it would remain a growth story within cards. Besides, the company is also expected to enter Home Equity lending in the current quarter, which should provide it with additional returns. Analysts at Citigroup believe that Discover Financial Services (NYSE:DFS) is an attractive risk/reward opportunity and they see a modest near-term upside in the stock due to growth in card lending and entry into Home Equity lending.
Conclusion
The second quarter witnessed favorable trends are far as the payments industry players were concerned. While the three aforementioned companies reported stronger-than-expected results, the future is not bright for all of them. I believe Discover Financial and Visa Inc (NYSE:V) are poised to benefit from the prevailing favorable environment in the payments industry.
The article These Financial Stocks Beat the Odds Again originally appeared on Fool.com and is written by Adnan Khan.
Adnan Khan has no position in any stocks mentioned. The Motley Fool recommends American Express and Visa. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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