Visa Inc. Stock Report

Visa Inc.

For VISA, the chart does not go back a full ten years because it only became a public company in March 2008. (Although it and its predecessors have existed for about 60 years.) Ignore the initial rise in the lines this is due to the lack of data for the first year year.) VISA has been growing its revenues and earnings per share very rapidly and steadily and growth in revenue and adjusted earnings per share accelerated temporarily in the year ended June 30, 2017 with the acquisition of VISA Europe. The earnings line is not far below the revenue line which reflects the fact that much of the revenue falls to the bottom line as profit. The recent flatness in book value per share is due to substantial share buybacks.

VISA (V)
RESEARCH SUMMARY
Report Author(s):  InvestorsFriend Inc. Analyst(s)
Author(s)’ disclosure of share ownership:  The Author(s) hold no shares
Based on financials from: Sep 30, ’17 Y.E.
Last updated: 16-Nov-17
Share Price At Date of Last Update: $111.25
Currency: $  U.S.
Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): Weak Buy / Hold at $111.25
SUMMARY AND RATING: This “cell” summarizes information from other cells below. Our earnings graph has only  9 years graphed because the company only became public in 2008. (Ignore the first year where the lines appear near vertical this is due to the zero start in the data) It was formerly owned by the large banks.  The economics of this business are wonderful as it acts as a sort of toll bridge on all VISA transactions. The predictability is somewhat uncertain, the business volume seems sure to grow but regulation could possibly lower the prices and earnings. The value ratios in isolation suggest perhaps a Weak Buy / Hold rating . The near-term outlook seems strong as the company projects adjusted earnings per share to grow about 16% in the next year.  The industry seems very attractive to VISA as an incumbent and the company does reasonably well on the Buffett tenets except it may have too many uncertainties and it is pricing in a lot of  growth . It has very strong competitive advantages and operates with oligopoly and even some monopolistic characteristics.  Insider trading signal is moderately negative.  Appears to have strong management. There are some risks due to regulation of prices and settlements of litigation. Overall, noting its competitive advantages and probable near-term growth and despite the  high P/E ratio, we rate it a Weak Buy / Hold
DESCRIPTION OF BUSINESS: (Updated December 31, 2016) Everyone has some familiarity with VISA but it is not so easy to concisely describe Visa Inc. Visa Inc. is the entity that sits at the top of the vast VISA credit and debit card operation. VISA Inc. itself does not issue credit cards but it processes much of the data and effectively collects license fees and “toll charges” on every VISA transaction. Its clients are banks that issue the credit cards and groups that acquire (sign-up) and deal with the merchants. VISA operates the world’s largest retail electronic payment system service and payment product platform. This includes consumer credit, debit, prepaid and commercial payments. VISA operates world wide. VISA is essentially a replacement for paper money, cheques and other forms of electronic transfer and it wants to continue to be the “currency” of choice.  It is important to understand that VISA does not take consumer credit risk. It operates as something of an electronic toll booth collecting fees on every VISA credit and debit transaction. Its revenues are mostly for licensing of the VISA brand to its bank customers, data processing fees and (lucrative) foreign currency translations fees. It effectively collects a toll on each transaction on its system. In Fiscal year 2016 (ended September 30) revenues were 52% from the U.S. and 48% from the rest of the world. The company estimates that among the major card companies it has a market share of 59% of the payments volume and 62% of the cards issued 5 up from 2015 figures of 51% of the payments volume and 59% of the cards issued which was unchanged from 2014 and down from 60% in 2013 and 61% in 2012 and 2011). Revenues are 36% from service fees (charged based on dollar volume), 34 from data processing fees (charged on the basis of number of transitions), 25% from what appears to be foreign exchange fees and 4% from other (which includes fees from VISA Europe. VISA has 14,200 employees and an equity market value of $190 billion.
ECONOMICS OF THE BUSINESS: The economics of this business are superb. Over  a 60 year period Visa Inc. and its predecessors have established credit cards as a dominant form of payment and developed strong debit card business. Visa Inc. is at the center of this functioning like a toll bridge. It has monopolistic characteristics. The business economics could be eroded in future through regulation of prices (which already occurs to some degree) or through technology allowing more competition. At present however, the economics continue to be wonderful. The adjusted profit ROE is 25%. Net profit as a percentage of revenue is 45%.
RISKS: Please refer to the annual report for a complete discussion of the risks listed by VISA.  The largest risks appear to be that its fees will become even more regulated and that it could lose certain lawsuits against it. There may be risks due to changing technology as well that may lead to more competition. But overall this does not appear to be a highly risky company in terms of its earnings level.
INSIDER TRADING / INSIDER HOLDING: There has been little activity in terms of number of trades. One officer sold $10 million worth in February at $86 after exercising options and another officer sold $1 million at $86 at the same time also after exercising options. An officer sold $3 million worth in July at 101. A director sold $1.1 million worth in August at $103. Three additional officers sold in non open market transitions or automated sales at prices from $86 to $101. Most insiders appear to be holding. The overall insider selling signal is moderately negative.
WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is simple to understand (marginal pass, positioned as essentially a toll booth on credit and debt card transactions but the vulnerability to regulation and technology changes is uncertain), has favorable long-term economics due to cost advantages or superior brand power (pass, Visa has almost monopolistic characteristics as most retailers and vendors have no real choice but to accept its cards), apparently able and trustworthy management (pass), a sensible price – below a conservative estimate of intrinsic value (fail given the high P/E ratio), Other criteria that have been attributed to Buffett include: a low debt ratio (pass, no debt), good recent profit history (pass), little chance of permanent loss of the investor’s capital (marginal pass, there is almost no hard assets and if regulation lowered its fees then a large share price decline is possible) a low level of maintenance type capital spending required to maintain existing operations excluding growth (pass).
MOST RECENT EARNINGS AND SALES TREND: Adjusted earnings growth in the last four quarters starting with the most recent being Q4 fiscal 2017 (fiscal years end in September) was 15%, 26% 27%, and 23%. Figures for revenue per share growth in these same four quarters were 17%, 26%, 23%, and 26%. Fiscal 2017 had adjusted EPS growth of 22% and revenue per share growth of 23%. Fiscal 2016 had adjusted EPS growth of 13% and revenue per share growth of 11%. Fiscal 2015 had adjusted EPS growth of 14% and revenue per share growth of 12%.  Fiscal 2014 had adjusted EPS growth of 17.5% and revenue per share growth of 12%. Overall the trend has been very strong indeed. Growth was particular strong in the year ended June 30, 2017 due to the acquisition of VISA Europe.
INDUSTRY SPECIFIC STATISTICS:
Earnings Growth Scenario and Justifiable P/E: The current trailing P/E of about 32 requires significant growth to justify it. For example 15% for the next five years and assuming the P/E declines to about 20.
VALUE RATIOS: (Based on a $111 share price.) The price to book value is nominally unattractive at 8.0.  And this ratio would appear to be extremely and unattractively high after deducting goodwill and intangibles, but this is not a company that is valued for its assets. The trailing P/E at 31.9 seems quite unattractive. The dividend yield is very low at 0.7% despite recent dividend increases. The dividend is low partly due to the low payout ratio of 22%.  The adjusted return on owners book equity (ROE) is extremely good at 25%. (The ROE can be explained by an usually high net profit of 45% of revenues but then sales are only 27% of the ending asset level but then assets are 2.08 times larger than the equity).  Earnings per share growth in the past five fiscal years was very strong at 17%.  Assuming that earnings per share grows much slower at 9% annually for five years and the P/E declines all the way to  15, we calculation intrinsic value per share of $63. This rises to $107 if we assume a robust annual growth of 15% and that the P/E only declines to 20 given the strong business model and relative lack of competition.  The ratios indicate that this is a very strong company but also that it may be at least fully valued. The stock could be considered undervalued if we assume that the P/E will remain at say 25 or higher and that growth be in the range of 15% annually. Overall we think the value ratios, would indicate perhaps a Weak Buy / hold rating.
SUPPORTING RESEARCH AND ANALYSIS  
Symbol and Exchange: VISA, US
Currency: $  U.S.
Contact: www.ir@visa.com
Web-site: www.visa.com
INCOME AND PRICE / EARNINGS RATIO ANALYSIS  
Latest four quarters annual sales $ millions: $18,358.0
Latest four quarters annual earnings $ millions: $6,699.0
P/E ratio based on latest four quarters earnings: 39.8
Latest four quarters annual earnings, adjusted, $ millions: $8,344.0
BASIS OR SOURCE OF ADJUSTED EARNINGS: Uses adjusted earnings as reported in the earnings press releases.
Quality of Earnings Measurement and Persistence: Earnings quality and persistence are good.
P/E ratio based on latest four quarters earnings, adjusted 31.9
Latest fiscal year annual earnings: $6,699.0
P/E ratio based on latest fiscal year earnings: 39.8
Fiscal earnings adjusted: $8,325.0
P/E ratio for fiscal earnings adjusted: 32.0
Latest four quarters profit as percent of sales 45.5%
Dividend Yield: 0.7%
Price / Sales Ratio 14.51
BALANCE SHEET ITEMS  
Price to (diluted) book value ratio:                                         8.04
Balance Sheet: (Updated as of September 30, 2017) Assets are mostly purchased intangibles at 63% of assets . Property plant and equipment comprises only 3% of assets. The great majority of the remainder is made up of cash (16% of assets), investments and receivables. The assets are financed 48% by equity, 27% by debt, 9% by deferred income taxes and the remainder is payables and accrued liabilities and longer term liabilities. This is a very strong balance sheet especially considering that the debt as a percentage of the market value of the equity is only 7%.
Quality of Net Assets and Book Value Measurement:  The company is valued for its earnings and market position, not for its assets. The great majority of its assets are intangible.
Number of Diluted common shares in millions:                              2,368.0
Controlling Shareholder: There is no controlling shareholder however many of the financial institutions are large holders of shares as a result of converting their previous ownership structure from when the company was not publicly traded.
Market Equity Capitalization (Value) $ millions: $263,440.0
Percentage of assets supported by common equity: (remainder is debt or other liabilities) 48.2%
Interest-bearing debt as a percentage of common equity 56%
Current assets / current liabilities: 1.9
Liquidity and capital structure: The company has strong financial liquidity even with the debt taken on to purchase VISA Europe.
RETURN ON EQUITY AND ON MARKET VALUE  
Latest four quarters adjusted (if applicable) net income return on average equity: 25.4%
Latest fiscal year adjusted (if applicable) net income return on average equity: 25.4%
Adjusted (if applicable) latest four quarters return on market capitalization: 3.2%
GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE  
5 years compounded growth in sales/share 14.8%
Volatility of sales growth per share:  Strong and steady
5 Years compounded growth in earnings/share 28.8%
5 years compounded growth in adjusted earnings per share 17.5%
Volatility of earnings growth:  Strong and steady.
Projected current year earnings $millions: $9,559.1
Management projected price to earnings ratio: 27.6
Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in earnings per share? Yes
Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: 19.7%
More conservative estimate of compounded growth in earnings per share over the forecast period: 9.0%
More optimistic estimate of compounded growth in earnings per share over the forecast period: 15.0%
OUTLOOK FOR BUSINESS:  The company has projected that adjusted earnings per share will rise at about 16% in fiscal 2018.
LONG TERM PREDICTABILITY: While nothing in life is certain, Visa seems likely to continue to grow as electronic commerce grows. However regulations and competition could curtail its monopolistic profit levels.
Estimated present value per share: We calculate $63 if adjusted earnings per share grow for 5 years at the more conservative rate of 9% and the shares can then be sold at a P/E of 15 and $107 if adjusted earnings per share grow at the more optimistic rate of 15% for 5 years and the shares can then be sold at a P/E of 20. Both estimates use a 6.5% required rate of return.
ADDITIONAL COMMENTS  
INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Barriers to entry (pass, it would be extremely difficult to develop a new competing world-wide credit card that multiple international financial institutions will contract with and that millions of retailers would accept). No issues with powerful suppliers (partial pass, there are eight major financial institutions that account for 25% of the transactions. Also some major retailers (notably Costco) have bargaining power by choosing to favor Visa versus MasterCard – although the vast majority of retailers will continue to accept both cards). No issues with dependence on powerful customers (pass, there is a world-wide population of customers), No potential for substitute products (pass, people need credit cards and in many cases there is no realistic substitute, although perhaps debit cards linked to lines of credit could be a substitute at some point) No tendency to compete ruinously on price (pass). Overall this industry appears to be very attractive to this incumbent although new technologies or regulation could change the picture.
COMPETITIVE ADVANTAGE: VISA has agreements with most of the major financial institutions, banking central payment systems, world wide retailer and its consumer network is not replicable by many organizations.  It is in an oligopoly position with MasterCard.  The VISA card is recognized world-wide. With consumers VISA credit cards are an oligopoly since each consumer is almost obligated to carry VISA or MasterCard. With retailers VISA credit cards seem to be virtually a monopoly as many retail businesses have no real choice but to accept VISA. With Banks VISA credit card is an oligopoly. Visa benefits greatly from “the network affect”, retailers need to accept the cards because so many consumers carry the card and consumers carry the card because so many retailers accept it. On the debit card side, the market power is not as strong and there are more competitors.
COMPETITIVE POSITION:  Visa along with MasterCard are the two dominant credit cards. American Express is a respectable third in dollar terms. Discover JCB (Japan) and Diner’s club have modest shares of the market. The 2016  annual report estimates that Visa has 62% of the total cards issued (MasterCard is 32% and the others total 6%) and Visa has 59% of the payments dollar volume (MasterCard 29%, Amex 9%, the others total 3%). On debit payments, there are other competing payment processors but we don’t have the market share figures. Visa gained substantial market share in cards and payment volume in 2016.
RECENT EVENTS: (This cell has not been updated for the 2017 annual report which will be published very shortly) Visa gained market share from MasterCard and Amex in fiscal 2016. A huge anti-trust settlement with retailers was overturned in 2016 and could lead to a larger payout by VISA. VISA closed its purchase of VISA Europe in June 2016. The purchase price  was $18 Billion but rises to $23.2 billion if performance targets are fully met by 2020. This transaction is large but is not huge compared to VISA’s then $190 billion market cap. The transaction was projected to lower earnings per share in fiscal 2016 and 2017 (that was likely on a GAAP basis, not as adjusted) and is expected to be accretive in the high single digits by 2020.  VISA won the Costco business from Amex though we suspect that the profit on the Costco business itself will be very low. VISA also won from MasterCard the partnership of United Services Automobile Association, which serves members of the U.S. military and their families. VISA is making it easier for software developers to develop new payment options that will use the VISA network.  VISA has made acquisitions and is attempting to offer more options for mobile payments.  Various litigation settlements regarding merchant fees and other charges are ongoing, and do not always proceed smoothly.
ACCOUNTING AND DISCLOSURE ISSUES: We like their press releases which gives the most important numbers in a concise summary. We like that they usually provide adjusted earnings, although it may not adjust for some other important items. Their statements about Visa Inc. not receiving any portion of interchange reimbursement fees and merchants not paying those fees while no doubt technically true, did not seem to present the situation in a way that struck us as completely true in substance.  In fact, they admit that in many jurisdictions they have historically set the default interchange reimbursement fees. There was a lengthy and excellent letter from the CEO in the annual report.
COMMON SHARE STRUCTURE USED:  There are Class A, B, and C  shares as well as preferred shares.  This is complex. However, the earnings per diluted share figures are as if all shares were converted to Class A and so this complex share structure is not of concern to us.
MANAGEMENT QUALITY:   Corporate performance suggests management is quite competent.  Some of the past large share buy backs at what now appear to be attractive prices is also a positive indicator.
Capital Allocation Skills: With a price to book ratio of 8.0 it appears that Visa has certainly made good returns on past investments. Its dividend and buy-back policies seem to have worked out well. It has favored buy-backs over increasing the dividend and given the share price performance this has worked out well. It remains to be seen if the recent repurchases at  higher prices was wise. Its purchase of VISA Europe mostly for cash (as  opposed to shares) will likely work out well given its low borrowing costs.
EXECUTIVE COMPENSATION: Total CEO compensation in fiscal 2014 was $12 million. Three others were in the $5 million range.  Overall, given the size of the company, executive compensation is not a big concern.
BOARD OF DIRECTORS: (Updated December 2015)  Includes 11 members which is quite large and composed of highly regarded and experienced members from a variety of industries. All are well educated and most have MBA degrees. There is representation from investment professionals, consumer products experts, as well as law and Information Technology experience. These people are probably not financially particularly reliant on their Board compensation from Visa. Base compensation, excluding committee work and stock compensation, is $100k which is relatively modest. However, total compensation was over $300k per member. Overall it is probably a good Board.
Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, earnings growth trend and industry attractiveness. We undertake a relatively detailed  analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry.
DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice.
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