Since going public in March, Visa has soaked in the market's love, rising 33.9%, but will the good vibe remain after its conservative outlook?
Despite posting a 27.6% rise in second-quarter earnings, investors kicked the San Francisco-based credit card company down 6.4%, or $4.80, to $70.83, in after-hours trading after it issued a three-year outlook that some might deem conservative for a company considered to be one of the best positioned in the card business: annual sales growth of 11.0% to 15.0%, annual adjusted operating margin in the low 40.0% range, annual adjusted earnings-per-share growth of 20.0% or greater, and annual free cash flow above $1 billion.
"At some point, the softening economy will likely impact our business in the U.S.," Chief Financial Officer Byron Pollitt said in a conference call with analysts.
For the quarter that ended March 31, Visa (nyse: V - news - people ) reported that its profit rose 27.6% to $314.0 million, or 39 cents per share. Analysts tend to exclude one-time gains and losses from their forecasts; excluding certain factors including litigation expenses, Visa's earnings amounted to 52 cents a share. The consensus analyst forecast in a Thomson Financial poll was 46 cents per share.
Litigation, though, is one of Visa's primary concerns. So far the company has set aside an astounding $3 billion from its initial public offering to cover potential liabilities from lawsuits accusing Visa of working to undercut competition and fix prices. A case brought by Discover Financial Services (nyse: DFSWI - news - people ) is scheduled to go to trial in September. Visa settled a similar suit with American Express (nyse: AXP - news - people ) last year.
During the second quarter, Visa said it paid American Express $945 million under a settlement that requires Visa to give its rival $2.07 billion over the next four years. Most analysts, however, have been fairly optimistic about Visa's prospects. Before Visa reported earnings late Monday, several analysts issued positive assessments of the company, based on a brand that was launched in 1977 and now has operations in 170 countries.
Visa had a huge coming out party in March as its shares rose 28.4% to close its first trading session at $56.50. The initial public offering was the largest on record, raising $17.9 billion. (See: "Investors Gobble Visa Shares")
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