Visa (V) Consumer Spending Trends ~ market folly

Monday, November 3, 2008

Visa (V) Consumer Spending Trends

Earnings Breakout has some important highlights/takeaways from the most recent Visa (V) earnings report/conference call.

"-Debit is now 53% of payments
-All disputes with major competitors now resolved
-Further slowdown in U.S. (10%) and cross-border volumes. Debit low-to-mid double digits. Credit got weaker through September
-Additional moderation from September to October. U.S. credit volume +1-2% in September turned NEGATIVE first few weeks of October. Debit still low double-digits
-Seeing shift to non-discretionary purchases. More credit worthy are driving purchases
-53% of debit spend is non-discretionary. >40% overall. Last recession it was 30%"

Those last 2 bullet points re-affirm the fact that the consumer will be in a pinch for a while to come and consumer recessions can be brutal. That will of course drive down consumer spending and thus corporate profits, which in turn reduces earnings estimates. But, that's a no-brainer given that earnings estimates are too high to begin with. The trends that Visa is seeing are of course a result of a rising unemployment rate and sluggish housing market, among other things.

I like to use Visa (V) and Mastercard (MA) as gauges on the economy simply because they are purely payment processors. They process both debit and credit spending as more and more people are using less cash and more plastic to pay for their purchases. They essentially are our eye on the consumer. So, when the aggregators like MA and V notice big spending trends, you better pay attention. And, although the consumer recession is upon us and will likely worsen, I still like MA and V as much longer-term plays. Like I said, they are purely payment processors and the world is shifting away from cash. Legendary investor and former Tiger Management hedge fund manager Julian Robertson agrees and recently bought both MA and V. This investment will almost have to be treated as a value play given the fact that they will face near-term headwinds with the credit crunch and a consumer slowdown. But, long-term, I think these are solid businesses to own, and I detailed why here.

Check out the rest of the Visa (V) earnings/conference call summary at Earnings Breakout.

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