Morning Note: Market news and updates from Visa and Atlas Copco.
Market News
Donald Trump renewed criticism of Jerome Powell, saying he knows “much more” about interest rates than the Fed chair. He also championed his economic policies and tariff regime at a rally to mark his 100th day in office. The president signed an executive order to ease the impact of his auto tariffs. China deserved the steep levies imposed and Beijing may find a way to reduce their impact on US consumers, Trump earlier told ABC News.
US equities rose again last night – S&P 500 (+0.6%); Nasdaq (+0.6%) – although futures fell after disappointing numbers from Super Micro, while Snap slid after omitting revenue guidance and warning of headwinds in advertising. Visa posted robust results (see below). Microsoft and Meta report later today.
In Asia this morning, stocks crept upwards: Nikkei 225 (+0.6%); Hang Seng (+0.4%); Shanghai Composite (%). China’s factory activity slipped into the worst contraction since December 2023, with the official manufacturing PMI dropping to 49 in April. The Caixin measure fell less than expected.
The FTSE 100 is currently 0.3% higher at 8,481, while Sterling trades at $1.3410 and €1.1760. Gold drifted down to $3,310 per ounce. Brent Crude continued to slide and currently trades at $62.50 a barrel. US crude inventories rose for a fifth week, climbing by 3.8 million barrels, API is said to have reported.
Source: Bloomberg
Company News
Yesterday evening, Visa released robust results for the three months to 31 March 2025, the second quarter of its FY2025 financial year. Earnings were slightly better than expected as consumer spending remained resilient, even with macroeconomic uncertainty. Growth in the group’s new revenue streams came in above 20%. The company reiterated its guidance for the full year and the shares were marked up 1% after-hours.
Visa is the world’s largest electronic payments network. It connects 14,500 financial institutions, 130m merchant locations, and 4.7bn cards. Visa is not a bank; it doesn’t lend or take on credit risk. It doesn’t issue cards or place the terminals at the merchant locations. Instead, the company earns a small fee from more than 230bn transactions processed on its network to generate annual revenue of more than $36bn. The company is increasingly evolving into ‘Visa-as-a-Service’.
Visa is benefiting from the ongoing shift from cash and cheques to electronic means of payment, and the growth of online retail, contactless, and mobile payment systems. In emerging markets, a lack of physical communication infrastructure traditionally provided a barrier to payments growth, but that has been removed by the emergence of mobile phone technology and a government focus on digitalising cash to reduce the black economy.
Overall, the company estimates consumer payments total $41tn worldwide, with 56% ($23tn) still available to be served, including $11bn cash and cheque. The company has six areas of focus including: “tap to everything”, token technology, cross-border, affluent consumers, A2A (account to account payments), and credit.
Growth in Commercial & Money Movement Solutions (CMS, formerly known as ‘new flows’) is expected to outpace the consumer payments business over the long term. The company believes the total addressable market of the opportunity is massive – $145tn in B2B payments and $55tn in disbursements/payouts/P2P. Even though yields for new flows are lower than the consumer business, on average, the business utilises Visa’s existing infrastructure and takes advantage of the company’s massive scale and fixed operating costs, resulting in higher margins.
The group’s third growth engine is value added services that help its clients and partners optimise their performance, differentiate their offerings and create better experiences for their customers. The company estimates the total addressable market at $520bn, meaning only 2% has been penetrated so far. Visa’s largest 250 clients now use an average of more than 20 value-added services, such as cybersecurity, fraud, data analytics, and AI, all of which enhance the group’s competitive advantage.
During the latest quarter, Visa generated a robust performance as consumer spending remained resilient, even with macroeconomic uncertainty. The results were driven by healthy trends in payments volume (+8% in constant currency, with debit up 9% and credit up 6%), processed transactions (+9% to 60.7bn), and cross-border volume growth (which includes a lot of e-commerce as well as travel, +13%).
Net revenue grew by 11% on a constant currency basis in the quarter to $9.6bn, in line with market expectation and at the top end of the company guidance for growth in the high single-digits to low double-digits.
Revenue was made up of service revenue (based on prior-quarters payment volume, +9% to $4.4bn); data processing (+10% to $4.7bn); international transaction revenue (+10% to $3.3bn); and other revenue (+24% to $937m). Client incentives, a contra-revenue item, were up 15% to $3.7bn. On the call, the company highlighted that value added services rose by 22% to $2.6bn, while Visa Direct increased by 28%.
The group continued to keep a tight rein on costs, with AI driving increased productivity – operating expenses were up 7% in the quarter, primarily driven in part by increases in personnel, marketing, and depreciation expenses. Adjusted EPS was up 12% on a constant currency basis, to $2.76, ahead of the market expectation of $2.68 and company guidance of high single-digits, helped in part by a lower-than-expected tax rate.
During the quarter, Visa generated $4.4bn of free cash flow. The group’s balance sheet remains strong, with cash, cash equivalents, and available-for-sale investment securities of $15.2bn at the end of March. The main capital allocation priority is to invest to grow the business, both organically and via acquisition.
Visa also has an ongoing commitment to return excess cash to shareholders. The group has a record of strong dividend growth, with the latest quarterly payout raised by 13% to $0.59. During the quarter, the company also bought back $4.5bn of its stock and authorised a new $30bn programme.
On the regulatory front, the US Department of Justice (DOJ) has filed a lawsuit accusing Visa of violating antitrust law by suppressing competition in debit card processing by threatening merchants with high fees and paying off potential rivals. Visa will fight the claims, which it calls meritless. Although the company is likely to be forced to alter some of its business practices, we believe its strong (secure and reliable) network will help it to defend its 60%+ market share. We also believe that in the absence of a settlement, it is likely to take several years for the decision/appeal process to reach a conclusion. Visa has a long-term track record of coping with regulatory challenges and has flexibility in its cost base to mitigate any bottom-line impact.
Overall, we believe the long-term growth prospects for Visa remain attractive, more so given the acceleration in recent years in the shift to e-commerce, tap-to-pay, and new digital payments, and in the number of acceptance points at SMEs. In addition, the broad application of digital payments by businesses and government agencies provides a huge market opportunity. At its last Investor Day, the company provided a longer-term revenue growth framework: consumer payments at 5%-7% and Commercial & money movement solutions/value added services at 16-18%. This implies total net revenue growth of 9%-12%.
On the call, the company reiterated its guidance for the financial year to 30 September 2025: revenue growth on a constant dollar basis is expected to be in the low double digits and EPS growth is expected to be in the low teens. For the current quarter, the company expects to generate revenue growth of low double digits and EPS growth in the high teens.
In the near term, while some short-term economic uncertainty persists, the group remains confident in its ability to execute its strategy and expand Visa’s role at the ‘centre of money movement. That said, a slowdown in overall consumer spending could be a drag on volumes, although spending across the network is very diversified, be it credit/debit, overseas/domestic, discretionary/non-discretionary spend, and low/high ticket spend. However, the company has previously said that if we do go into a recession, Visa is now stronger in debit – the card of choice in tougher times – than it was in the 2008/09 financial crisis. The group also highlights that if there is a downturn, they have plenty of flexibility on costs and client incentives. Note that half of the group marketing spend is variable.
Source: Bloomberg
Yesterday lunchtime Atlas Copco released Q1 results which were slightly below market expectations. Looking forward, the group now expects that while the world’s economic development makes the outlook uncertain, customer activity level is expected to weaken somewhat. This is a deterioration versus the commentary at the time of the full-year results in January. In response, the shares, which are listed in Sweden, were marked down by 4% and are trading ex-dividend this morning.
Atlas Copco is a world-leading manufacturer of innovative compressors, vacuum solutions, generators, pumps, power tools, and assembly systems. The group has a diverse customer base made up of general manufacturing (22%); process industry (20%); electronics/semis (16%); construction (12%); auto (10%); and other (20%). The products help the customer to increase operational performance, save energy costs, reduce contamination, cut down on failures in the field, lower noise levels, and extend service intervals.
As a result, the company provides exposure to a broad range of trends: demand for increased energy efficiency and reduced emissions; increased use of lightweight materials in transport industries; the transition from petrol to electric vehicles; increased use of demanding materials and production environments in processes for semiconductor and industrial production; increased production automation and smart factories; demand for improved ergonomics; and increased demand for digitally-supported service offers. Overall, the company will play a role in the effort to reorganise and improve the resilience of supply chains, bring manufacturing closer to domestic markets, and increase automation in the face of higher labour costs or deteriorating demographics. Finally, over time the vacuum business should benefit from the expansion of the North American semiconductor manufacturing market.
The target is to grow revenue by 8% per annum, primarily through organic means, complemented by selective acquisitions of companies in or close to existing core competencies. The group operates an asset-light strategy – only components that are critical to the performance of the equipment are manufactured in-house. The company has integrated itself with its customers and can provide rapid and extensive services and support of their installed base of equipment. 36% of revenue (and 50%+ of operating profit) is generated from service (i.e., spare parts, maintenance, repairs, consumables, accessories, and rental). This is more stable than equipment sales and provides a strong base for the business and greater resilience in difficult times. The cost of the group’s equipment is low relative to the customer’s operating costs and, as a result, the company has strong pricing power, important at a time of raw material cost inflation. Atlas Copco is based in Sweden and reports in Swedish Krona (SEK).
In 2024, Vagner Rego, formerly the Business Area President for Compressor Technique, took up the role of CEO. The Wallenberg Family (through its holding company, Investor) is the largest shareholder of Atlas Copco, having overseen its entire history, and has a member on the Board. The business is run for the long term in a way that ensures it is passed on to the next generation in a better shape than it was inherited, with a focus on consistent operational culture, financial prudence, and sensible capital allocation.
During the first quarter of 2025, the overall demand for Atlas Copco Group’s equipment and services remained at the same level as the previous year. Orders for the service business, including specialty rental, increased while the order intake for equipment was mixed.
Revenue was flat at SEK 42.7bn, slightly below the market forecast of SEK 43.4bn. In organic terms, which excludes M&A (+2%) and currency (flat), revenue was down 2%, held back in part by a tough year-on-year comparative. Order intake was flat in organic terms at SEK 46.6bn, with an increase in Asia offset by a decline in Europe and North America.
Atlas Copco operates through four divisions or ‘Techniques’, with the performance in the first quarter as follows:
· Compressor Technique (44% of 2024 sales): organic revenue and orders both rose by 3%. The order intake for industrial compressors decreased somewhat, whereas order volumes for gas and process compressors increased significantly.
· Vacuum Technique (23% of sales): organic revenue fell by 5%, while orders rose by 1%. The order intake for vacuum equipment to the semiconductor industry, and vacuum equipment to industrial and scientific vacuum applications was basically unchanged.
· Industrial Technique (17% of sales): organic revenue and orders fell by 9% and 8% respectively. Orders for industrial assembly and vision solutions decreased due to weaker demand from the general industry and automotive customers.
· Power Technique (16% of sales): organic revenue and orders were down 5% and 4% respectively. The order intake for power equipment decreased, primarily due to weaker demand for portable compressors.
Atlas Copco generates attractive margins, with gross above 40%, providing some shelter against rising raw material costs, and operating margin above 20%. In Q1, adjusted operating profit rose by 6.5% to SEK 8.87bn, versus the SEK 9.36bn market forecast, with the margin down 130 basis points to 20.8%, negatively affected by volume, sales mix, increased R&D and functional costs, as well as dilution from recent acquisitions.
On the analysts’ call, the company said that the benefits from restructuring activities have not been fully achieved yet. EPS fell by 8% in Q1 to SEK 1.35, versus the market forecast of SEK 1.50. The return on capital employed during the previous 12 months slipped from 30% to 27% but is still well above the group’s 8.0% cost of capital.
The company has a robust balance sheet and continues to generate strong cash flow (SEK 6.6bn in Q1). Net debt reduced from SEK 18.1bn to SEK 13.4bn, while interest-bearing liabilities have an average maturity of 4.7 years. Financial gearing is a very comfortable 0.3x net debt to EBITDA.
The group continued to consolidate its industry with acquisitions, with 10 deals completed in the first quarter. The dividend policy is to pay out 50% of net income. For 2024, the group approved a payout of SEK 3.00 per share, 7% higher than the previous year, equivalent to a 2% yield.
The group provided brief commentary on the near-term outlook, highlighting that while the world’s economic development makes the outlook uncertain, customer activity level is expected to weaken somewhat. This represents a deterioration from the commentary from three months ago that ‘customer activity will remain at the current level’.
Regarding tariffs, the company highlighted that it has 18 production facilities in the US. They are working on a mitigation strategy, with short-term actions focused on price and surcharges.
Source: Bloomberg
