Visa Finds Gold In Your Plastic

1/23/2012


  Recent Price
$103
  Dividend
$0.88
  Yield
0.9%
  P/E Ratio
21
  Shares (millions)
692
  Long-Term Debts as % of Capital
0%
  52-Week Price Range
$103.45 - $67.51

Visa ($103; V) controls the entrance to an electronic payment network, a virtual toll road that connects spenders to both lenders and sellers.

Consumers, businesses and governments continue to migrate toward the convenience and security of electronic payments, a trend evident in Visa's operating results. Over the last five years, the company has delivered annualized growth of 26% for sales and 55% for cash provided by operations. Fatter operating profit margins have allowed earnings per share to rise at least 25% in each of the last eight quarters on revenue growth in excess of 12%.

Shares of Visa, which went public in 2008, have returned 45% in the last year. It earns a Value score of just 40, and at 21 times trailing earnings, shares trade within 7% of their three-year average. But considering Visa's exceptional operating momentum and excellent growth outlook, the stock seems reasonably valued. Visa, already a Long-Term Buy, is being added to the Buy List.

Business breakdown

Visa does not issue cards, extend credit, assess cardholder fees, or collect interest. The company derives revenue from fees paid by banks based on the number of transactions (up 12% in fiscal 2011 ended September) and the value of those transactions, or payment volume (up 16%). Consumer credit accounted for 52% of Visa's payment volume in fiscal 2011, followed by 37% for consumer debit and 11% for commercial. All grew volume more than 15%.

Visa competes with MasterCard ($346; MA), American Express ($50; AXP), Discover Financial Services ($27; DFS), JCB, and Diners Club. Within that group, Visa has a global market share of 52% by payment volume.

Visa controls a larger share of the U.S. debit market than chief rival MasterCard, leaving it more exposed to new regulations that cap debit-card interchange fees — what banks charge merchants when customers use debit cards. U.S. debit accounts for slightly more than 20% of Visa's revenue, and management expects the new rules to erode pricing leverage with banks and reduce the number and volume of U.S. debit payments processed.

Consumer sentiment improved in December, but U.S. paychecks have climbed at a slower pace than spending. That trend has some concerned that consumers will focus on trimming debt, causing credit-card spending to lag overall spending. However, Visa's global expansion efforts are trimming its reliance on the U.S. consumer.

Conclusion

Consensus estimates project strong growth in fiscal 2012 ending September, with per-share earnings expected to climb 17% on 10% higher revenue. Visa sees free cash flow exceeding $4 billion, up at least 29%. The stock has considerable defensive appeal, as growth should continue even if economic growth falters.

The balance sheet contains $7.19 billion in cash, or $10.38 per share, and no debt. Buybacks have shrunk the share count more than 10% in the past three years. An annual report for Visa Inc. is available at P.O. Box 8999, San Francisco, CA 94128; (415) 932-2100; www.visa.com.

VISA
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '11
1.27
vs.
0.95
+ 13%
94.75
-
76.11
20 - 16
Jun '11
1.26
vs.
0.97
+ 14%
87.36
-
73.11
20 - 17
Mar '11
1.23
vs.
0.96
+ 15%
77.08
-
67.51
19 - 16
Dec '10
1.23
vs.
1.02
+ 14%
81.75
-
66.50
21 - 17
           
Year
(Sep.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2011
9.19
4.99
0.60
94.75
-
66.50
19 - 13
2010
8.07
3.91
0.50
97.19
-
64.90
25 - 17
2009
6.91
2.92
0.42
74.99
-
41.78
26 - 14
2008
6.26
2.25
0.11
89.84
-
55.00
40 - 24
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
95
89
40
95
94
96
85

   * Earnings exclude special items.
   † Quadrix® scores are percentile ranks, with 100 the best.


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