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On Mar 5, we reiterated our Neutral recommendation on Visa Inc. (V - Analyst Report) based on its improving product portfolio and operating leverage that partly mitigate the regulatory challenges. However, higher expenses and competition raise caution.

Why the Retention?

Estimates for this electronic payment processor improved since the company reported its fiscal first-quarter 2013 results on Feb 6. Visa’s first-quarter earnings per share and revenue of $1.82 and $2.85 billion, respectively, outpaced the Zacks Consensus Estimate as well as the year-ago results.

Improved pricing and higher spending increased the number of processed transactions, which along with higher cross border volumes continue to drive the top line. These were partially offset by escalated operating and litigation expenses together with higher incentives on card transactions. A debt-free balance sheet and increased free cash flow outlook in fiscal 2013 paves the way for ample growth opportunities.

However, increasing regulatory compliances and higher-than-expected litigation charges continue to restrict the desired upside. The recent $4.4 billion payout against litigation settlement charges resulted in net operating cash outflow of $2.8 billion in the first-quarter of fiscal 2013. Additionally, the global payments industry is intensely competitive and continues to challenge Visa’s market share in the future.

Following the release of the first-quarter results, the Zacks Consensus Estimate for 2013 inched up 0.5% to $7.32 per share in the last 30 days, wherein 16 out of 27 estimates were revised upward and one downward revision was witnessed. The Zacks Consensus Estimate for 2014 also edged up 0.6% to $8.50 per share with 13 out of 25 upward estimate revisions and one downward revision in the last 30 days.

With the Zacks Consensus Estimates for both 2013 and 2014 going up slightly, the company now has a Zacks Rank #2 (Buy).

Other Financial Stocks That Warrant a Look

While we see no clear directional pressure on Visa in the near term, other stocks in the financial sector that are outperforming include Moody’s Corp. (MCO - Analyst Report), Viad Corp. (VVI - Snapshot Report) and Vantiv Inc. (VNTV - Snapshot Report). All of these carry a Zacks Rank #1 (Strong Buy).

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