Visa: Already Priced to Perfection

by: Michael Krause March 20, 2008 | about stocks: MA / V    

Michael B. Krause

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Do I chase the hottest current IPO - Visa (V)?

On 2007 revenues of $3.6B with operating expenses of $2.4B, we net precisely $1.2B in EBIT. Lets give them a negative effective tax rate going forward the next year to entirely offset the litigation expense of 2.6B+. Net margin excluding the expense is near 33%. '06 net margin was around 25%.

The nearly $20B in cash they'll end up entirely raising (from the final exercise of 40M shares, giving a total of 445M US shares) will give them a book value near a third their offering price. Additionally, interest earned on their gigantic cash position will net them $600M/yr (3% yield). That will raise their earnings to projected $2B for '08 and 1.485B for '09 (20% earnings growth from 07, and 15% earnings growth from 08, with taxes), yielding '08 2.47 EPS and '09 $1.83 EPS. That gives you a 24.29 multiple for '08 and 32.23 multiple for '09 against 15-20% earnings growth.

With a 48B+ market cap at $60/share, almost double to MasterCard's (MA) current market cap, V's valuation is right in line with MA. On the broader fundamentals, a slowing consumer should be a non-issue for a stock like this, as continued debit card volume migrations will probably support the top line. Furthermore, any commercial paper collapse related to systemic consumer credit defaults the bears may predict will just result in credit to debit volume transition, nothing else. A long V short MA position may be a good combo trade as the V cash position dwarfs MA's relatively small 3B cash position.

With a market full of much better values, I'd pass this one up. Just a market perform - it's already priced to optimism. Not quite so attractive in a market full of steals.

(Note these numbers are counted against 808M outstanding shares, assuming 445M are offered to US buyers.)

Disclosure: None

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This article has 44 comments:

  •  
    Mar 20 12:03 PM
    Visa is the next $200.00 stock, easily. I have 245 shares and I plan on keeping them for awhile until it tops $200.00, which should be pretty soon.
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  •  
    Mar 20 12:13 PM
    I have 51 shares and I plan to do the same. Thank you Visa for paying for my engagement ring....lol
    Reply | Link to Comment
  •  
    Mar 20 12:25 PM
    I am new to stocks. We have 500 shares and hopefully it will help make retirement a bit easier.
    Reply | Link to Comment
  •  
    Mar 20 12:29 PM
    Be careful, Visa may look good right now, but once all the investor start selling off to take their profits, it may fall below what it came out of IPO from, expecially since the credit card arena will soon follow the mortgage crisis!!!
    Reply | Link to Comment
  •  
    Mar 20 12:30 PM
    That's some of the worst analysis I've ever read. For one, Visa doesn't get the cash from the IPO. The banks such as JP Morgan and National City sold the shares issued in the IPO and will be receiving the proceeds.

    Visa's market share is more than double Mastercards. I expect their market cap will also be more than double. I see the stock going to $80 within 3 months.

    Enjoy the Crow.
    Reply | Link to Comment
  •  
    Mar 20 12:37 PM
    The credit crunch is basically over. The economic shock waves are still present, but liquidity had been restored. Even if it wasn't, it would be a non-issue with the sheer volume of transactions that Visa handles. I'd ride this one up to $75 and then decide.
    Reply | Link to Comment
  •  
    Mar 20 12:47 PM
    I totally disagree with the above article. But, I'm glad at least that there is a mind set dedicated to balancing out the perspective that Visa carries no risk to investors. I would say that to expect the same performance as Mastercard is far from a given, but I do think it a very likely indication of just how high this stock will go. Those who are patient and ride out the next few years are more than likely going to reap a great reward, as Visa will as well.

    This stock may be priced perfectly for public release/consumption, and given the issues Visa will face (and overcome) over the next 6 months. But after the legal litigation is resolved, I think it's fairly obvious between earnings, brand loyalty, total market buy-in, and Visa's perseverance in the market overall will prove that anything under 150-200 USD per share of this stock is undervalued.

    Of course, half the fun in trading is putting your money on the line (which I did), and the other half is seeing whether you're right. So far, obvious winners in the past that I've put money on were the Google IPO and the Apple stock split (purchased at around 90 beforehand, doubled my shares to 45 a pop after the split, and now trading at 133....very nice).

    Visa will perform, but again, I do appreciate the balanced perspective since nothing is EVER a given in the stock market.
    Reply | Link to Comment
  •  
    Mar 20 12:48 PM
    I missed Google and Mastercard. I didn't miss Visa. This stock is a can't miss. Also, User157788, Visa doesn't print cards, it only processes the transactions. As customers use more credit to pay for bills and needed items (not to mention debit cards) Visa will make more money. Thanks to Visa to supplementing my Wedding costs!!
    Reply | Link to Comment
  •  
    Mar 20 12:54 PM
    Interesting that the "prognosticator&q... recommends a short position in MA, with MA up $ 8.00 today ..Nice call fella !
    Another market "genius" with another stellar recommendation ...!
    Reply | Link to Comment
  •  
    Mar 20 12:55 PM
    wait a week or two. There will be more bad financial news. Early investors will sell visa to lock in profit, price will come down.
    Reply | Link to Comment
  •  
    Mar 20 01:14 PM
    I was interested in buying, until I saw the photo of the huge Visa banner on Wall Street. Seems like a lot of hype, being sold as an oasis in the current crisis...Most of what is being written is that it will not go up like other IPO's, will probably rise for the next half year 10% to 20%, then plateau...and sink.
    Reply | Link to Comment
  •  
    Mar 20 01:27 PM
    I think Visa will slowly go up overtime.... VISA has more market share than MA, and this baby's just got started... Its a tough market out there, and shes holding up so far... In my opinion Visa deserves a higher multiple than MA. Plus with all the new assets they've gained "stock" can you use that for cheap loans to grow....
    Reply | Link to Comment
  •  
    Mar 20 01:33 PM
    For the long haul I think it is a safe investment. For short term profits I would look elsewhere

    David
    Click My Name for the $99 Vegas Deal
    Reply | Link to Comment
  •  
    Mar 20 01:47 PM
    Visa is definitely going to go up, no question about it. I think that even short term it is a greast investment being that it is up 11.5% as we speak. Whoever wrote this article is a complete idiot and they definitely need to lighten up. Visa's IPO is definitely helping our economy and giving many of us faith in stocks again, something that many of us need and miss. I easily see Visa passing mastercard in under a year.
    Reply | Link to Comment
  •  
    Mar 20 01:47 PM
    I havent gone through all of the comments, but you do realize that VISA is pretty much immune to the credit "crunch?" First off, a great majority of visas sales are for the necessities of life(food, clothes, toilietries, etc). Second off, VISA DOESNT issue credit or interest rates, banks do. THats why you are really rolling the dice if you buy Discover or American express, because THEY issue credit and are very suseptible to the credit issues. However, VISA just takes a tiny bit off each transaction. So even if a person never pays their bill, visa still gets paid. They business is the infrastructure of credit card processing. Also, the CEO was on CNBC yesterday and said Visa actually makes more money from debit transactions as apposed to credit. All of that equals buy buy buy and your guranteed to have a huge grin on your face in a year when this stock is near 100 :). And oh yea, Visa isnt going away anytime soon. They have 3x the marketshare mastercard has, and retail would fall apart if anythin ghappened to visas credit processing.
    Reply | Link to Comment
  •  
    Mar 20 01:57 PM
    I agree, not a great buy at the moment versus other more attractive options. Long term it is worth holding but not for new buyers. It will dip back to mid fifties as soon as next financial scare hits, probably next week. The market is way to volatile right now for stocks that are already fairly priced.
    Reply | Link to Comment
  •  
    Mar 20 02:39 PM
    In all honesty, I am not that worried about Visa dipping... Even if a financial scare does take place next week, and it probably will, everyone is still going to be using their credit and debit cars and Visa does not loan out any money on purchases, the banks do, as already stated. Visa is basically a gateway with a fee for using plastic that a merchant has to pay and they will be hurt very little if our economy does drop into a recession, if it has not already. The end of this week has looked very good and bright so far... I am definitely saying strong buy on VISA.
    Reply | Link to Comment
  •  
    Mar 20 03:02 PM
    Good information.Yes Visa takes little risk and yes it is a relatively stable investment over time.However history has shown that anything thats good doesnt go up slowly as we have seen today >10% as of now.Will continue to climb and quickly at that.Yesterday over 40% of the issued shares changed hands (on profit taking).There exist a great appetite for these shares...Visa has paid me back some....
    Reply | Link to Comment
  •  
    Mar 20 03:04 PM
    I need some advice: I am a very inexperienced trader. I have never bought or sold stocks in my life (with the exception of a Coca-Cola DRIP account my father bought me many years ago). I am relatively young and want to make some money. I want to buy some Visa stock and I have a few options. I am being asked what price type I want: "Market", "Limit", "Stop", "Stop Limit", "Trailing Stop $", or "Trailing Stop %". First, what do these all mean?

    Next: Depending on which of those I choose, I am able to choose for terms: "Good for the day", "Good for 60 days", "Immediate or Cancel", "Fill or Kill", "Extended hours - Godd for the day", or "Extended hours - Immediate or cancel" What do these mean?

    I appreciate any one that can help me with some advice.
    Reply | Link to Comment
  •  
    Mar 20 03:27 PM
    Visa is much larger then Mastercard, what would logic dictate to the market? I missed out on the IPO day because of technical issues but just bought a bunch of shares even though it is 10 bux more then yesterday, still worth it.
    Reply | Link to Comment
  •  
    Mar 20 03:29 PM
    New2wrld: I am not a professional broker so take my advice with a grain of salt, but I would suggest you place a "limit" BUY order about 10-15 cents above the current realtime quote, this will get you a good price.
    Reply | Link to Comment
  •  
    Mar 20 03:34 PM
    I bought some this morning. This is a long term play, with growth in emerging markets, growth from most modern societies going away from cash. I would accumulate when possible, as this stock should keep going up long term.
    Reply | Link to Comment
  •  
    Mar 20 05:43 PM
    I think V is a good buy.I got it yesterday at 59.50 , it is a very substantial part of my portfolio. I personally would say that Visa having a bigger market share , higher margins and the fact that its not a lender of credit , just a processor. I understand profit taking for the IPO buyers at 44 , but if u were one of them , would u sell now , or let this Stock live out its potential.
    Reply | Link to Comment
  •  
    Mar 20 06:55 PM
    I got it at 58.05 in first day visa go public. I like the follwoing words somebody wrotten:
    Unlike other credit card companies who lend, Visa carries no consumer debt on its books. The company is completely insulated from the current credit crisis. It makes its money from transaction fees which have been rising nicely. Visa handled more than 44 billion transactions last year, totaling around $3.2 trillion, much more than its main competitor MasterCard (NYSE:MA), whose shares are up over 450% since its IPO in May of 2006.

    Reply | Link to Comment
  •  
    Mar 20 06:56 PM
    Lot of euphoric posting in this thread. Interesting. I do stand corrected about allocation of cash; from what I hear there is some more complex distribution methodology rather than sitting in a big bank account. (a portion will go to the litigation escrow account, another portion goes to share redemption ... this ultimately nullifies my 'value' call of V over MA shares on a cash vs cash analysis)

    But this is a conversion to liquid stock of Visa assets for the hundreds of banks that hold an interest in this ... The cash raised in the IPO goes to the company itself. The banks that own it are just shareholders with a now liquid position.
    Reply | Link to Comment
  •  
    Mar 20 07:12 PM
    new2world - you must be using eTrade so click on "Online Service Center" (top right), "Get answers to Frequently asked Questions" (middle right), then scroll down to the very bottom and select "Where can I learn more about understanding order types?"
    Reply | Link to Comment
  •  
    Mar 20 10:31 PM
    Visa is overvalued at $64 as compared to MA at $200. Most of the comments are going by the unit value of $200 of MA that is nonsense. You have to go by EPS - Visa has issued too many shares so its unit value is lower $64, which itself is too high.
    Visa would be a good stock at 50 (not 64).
    Reply | Link to Comment
  •  
    Mar 20 11:07 PM
    hah, but if u value the stock at $50, u dont take into account its growth rate. My fundamental analysis shows that even at a conservative 3% growth rate each year 4 the next 5 years and peppertuity right after; this stock is worth somewhere around $150. Simply put, if Visa is still the dominant payment transfer of the world in the next 5 years; it should go up to $150 before sth happens.
    I know there are flaws in fundamental analysis; but can u enlighten me by showing why this stock should be traded at $50 ?
    Reply | Link to Comment
  •  
    Mar 21 12:33 AM
    At about 50 its valuation PE & PEG will be comparable with MA. By some (lots) measure MA itself may be overvalued at > 200. If MA should be at 200 then Visa should be around at 50.
    Reply | Link to Comment
  •  
    Mar 21 12:46 AM
    Working in the CC industry, I knmow a "little something" about how
    it really works. I bought MA at 50 (should have bought more) and sold
    at around 120. I never thought MA would break 75. Visa will break 75 and move into the 90's, people buy what they think they know.
    In these cases both of these operate Associations that are literally
    just toll boths, they collect fees, they hold no consumer debt, this is a long, buy some now, buy somem later, you will be glad you did.
    Reply | Link to Comment
  •  
    Mar 21 01:38 AM
    V is a great stock, but you guys that think it's going to $200 in the next couple months are out of your mind.
    i don't think V is as big a secret as MA was a couple years back. it's been the only IPO talked about for the last 6 months. anything this hyped is usually short term disappointing, solid fundamentals or not.
    Reply | Link to Comment
  •  
    Mar 21 07:47 AM
    V vs GOOG Fidelity and it's funds own about 30 million shares of GOOG and it's dropped approx 300 points with all that fidelity owns I'm guessing may become a bear sterns if so the market drops like in 1928 If Fidelity goes bankrupt so will lots of companys so I'm very worried so I'm day trading DRYS with a P/E 4.30 approx does any real analyst believe Fidelity can go bankrupt I can't quite figure how much Fidelity has lost in this market but I'm guessing over 200 billion so far this year and no one is talking about it why
    Reply | Link to Comment
  •  
    Mar 21 08:32 AM
    Data says that the next bubble after housing loan is credit card loan..with hundreds of billions in credit card default loans...how would it affect Visa price in the next few months ? any inputs ?
    Reply | Link to Comment
  •  
    Mar 21 09:15 AM
    Timing is everything - especially in IPOs.
    And the timing on this one will be wrong for shareholders who are hoping for the "next big one." Take your quick profit and move on.
    Reply | Link to Comment
  •  
    Mar 21 01:48 PM
    Its going to 48-49 in a week. Mark my words. I AM YOUR FATHER
    Reply | Link to Comment