In this article, let's take a look at Visa Inc. (V, Financial), a $133.03 billion market cap company, which is the world's largest retail electronic payments network and leading payments brand, providing services to consumers, businesses and governments globally.
A Market Leader
The company is a leader in the electronic payments market, accounting for about half of all credit card transactions. The payment method is accepted by merchants and attractive to cardholders. This makes that each user of the Visa brand increases its value to each other. Visa earns fees based on the volume of payments as well as the number of transactions processed through the network. Payments volumes which are a key driver of Visa's business models, increased by 9% in fiscal year 20 13 to $4.3 trillion, driven by 10% growth in transactions processed.
Expanding the Business
Visa plans to expand the size of its payments network in high growth geographies in which it currently operates and also increase the number of countries in which it provides value-added services, such as enhanced risk management, dispute processing, loyalty programs, alerts, offers, and other information-based services, which are enabled by a centralized global processing platform.
Positive Outlook
We see that next five years are likely to see rapid changes in the nature of the payment business as cards are going to be replaced by electronic payment methods. Although this is good to Visa, it also constitutes a threat as new competitors attempt to manage the payment process, which can develop new ways to authenticate payments. Nevertheless, we can affirm that only few competitors can reach what Visa offers in term of technology or security.
Cash Dividends
Visa has an attractive dividend policy showing its commitment to return cash to investors in the form of dividends as it generates healthy cash flow on a regular basis. Since 2008, the consistency of track-record dividends payments and since 2011 it is doubling its quarterly dividend. It´s dividend yield is at 0.8%.
We also have favorable expectations regarding share repurchases for the next years. Visa repurchased more than $5 billion in shares in its fiscal 2013, and the firm's board authorized an additional $5 billion in repurchases in October 2013.
Estimated One-Year Price
According to Yahoo! Finance, the estimated one-year target share price is $ 249.16, so if you buy shares at current market price ($213.48), your return from price appreciation would be 16.7%. In addition, you have to consider any cash flow received by the asset. So for holding the stock one year, you'll be paid a dividend of $1.6 at the end of the year. If we divide this number by current price per share, we obtain the dividend yield, which is the other component of the return on an investment for a stock, and in this case is 0.8%. So the total expected return for investing in Visa is 17.5%, which we believe is an attractive stock return.
Revenues, Margins and Profitability
Looking at profitability, revenues grew by 5.13% and led earnings per share increased by 15.4% in the most recent quarter compared to the same quarter a year ago ($2.17 vs $1.88). During the past fiscal year, the company increased its bottom line. It earned $7.58 versus $3.13 in the previous year. This year, Wall Street expects an improvement in earnings ($8.98 versus $7.58).
When analyzing margins, we found that the gross profit margin is rather high, at 67.48%. Further, the net profit margin of 43.10% significantly outperformed against the industry average.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| V | Visa | 20.51 |
| AXP | American Express Co. | 29.10 |
| MA | MasterCard Inc. | 47.20 |
| Industry Median | 12.58 |
The company has a current ratio of 20.51% which is higher than the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. For investors looking for a higher ratio, American Express Co. (AXP, Financial) and MasterCard Inc. (MA, Financial) could be the options.
It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 24.4x, trading at a premium compared to an average of 13.10x for the industry. To use another metric, its price-to-book ratio of 4.88x indicates a premium versus the industry average of 1.60x while the price-to-sales ratio of 10.91x is above the industry average of 2.68x.
As we can see in the next chart, the stock price has an interesting upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $28.787, that is a 23.5% compound annual growth rate (CAGR).
Final Comment
Companies in this industry must have the ability to reach new markets and meet customer needs. The rapidly expanding market of mobile devices in an increasingly connected world and recent developments in technological applications and mobile payment service are seen as a major growth opportunity because there is a change in the patterns of consumption. Of course we continue believe that Visa is a good bet due to its brand and good position in the market.
Hedge fund guru John Griffin (Trades, Portfolio) bought the stock, while Joel Greenblatt (Trades, Portfolio), Bill Nygren (Trades, Portfolio), David Rolfe (Trades, Portfolio), Warren Buffet, Jim Chanos (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Tom Russo (Trades, Portfolio), Bill Frels (Trades, Portfolio) and Jean-Marie Eveillard (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014, as well as Manning & Napier Advisors, Inc., RS Investment Management (Trades, Portfolio) and MS Global Franchise Fund (Trades, Portfolio).
Disclosure: Omar Venerio holds no position in any stocks mentioned
