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On Jun 18, 2014, we issued an updated research report on Visa Inc. (V - Analyst Report). While the company is gaining strength fundamentally, intense competition and regulatory challenges continue to restrict desired growth.

This Zacks Rank #3 (Hold) stock has delivered positive earnings surprise in 3 of the last 4 quarters with an average beat of 2.5%. The company’s second-quarter fiscal 2014 (ended Mar 2014) earnings topped both the Zacks Consensus Estimate by 0.5% and was higher than the year-ago quarter figure by 5.2%.

The growth momentum from improved first-quarter results was partially offset by adverse currency fluctuations and difficult comps. This is reflected in Visa’s top-line growth guidance of low double-digits, excluding a 2% reduction due to negative impact of foreign currency. Also, the bottom-line growth expectation of mid-to-high teen range in fiscal 2014 is lower than 22% growth recorded in fiscal 2013.

Additionally, being the leading card payment company, Visa has to incur heavy advertising and personnel costs. Moreover, marketing expenses are expected to rise in fiscal 2014. As a result of facing litigations across various jurisdictions, the company also shelled out $194 million in the first half of fiscal 2014 to settle a $1.1 billion worth of multi-district litigation. More such payments are expected in the future.

Furthermore, Visa is subject to increasing global regulatory focus that adversely affect the cash outlays and goodwill of the company. In this respect, the latest amendments in Russia’s national payment system rules and provisions for reduced interchange fees in Europe and the U.S. are likely to hurt the company’ fundamentals if implemented.

Nevertheless, a debt-free balance sheet, constant synergies from diversified business strategies to tap the latest e-Commerce and mobile commerce markets, technology upgrades, effective marketing efforts and cost-cutting initiatives, along with a healthy market recovery have the potential to boost Visa’s growth prospects. Capital deployment through strategic acquisitions and alliances coupled with incremental shareholder return further boost investors’ confidence.

Overall, balanced risk-reward in the near term has led to minor estimate revisions for 2014 and 2015 in the past 30 days. The Zacks Consensus Estimate for 2014 rose a penny to $8.97 a share, while the same for 2015 dipped a penny to $10.36 per share. However, on a year-over-year basis, earnings are expected to grow by about 20% in 2014 and 15.5% in 2015.

Key Picks in the Sector

Some better-ranked stocks in the financial sector include VeriFone Systems Inc. (PAY - Analyst Report), Xoom Corp. (XOOM - Snapshot Report) and Fidelity National Information Services Inc. (FIS - Analyst Report). All these stocks sport a Zacks Rank #1 (Strong Buy).

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