Visa Inc. (V), a Long-Term Opportunity?
The services it offers are many and range from branded card payments product platforms, which customers use to develop and offer credit, charge, deferred debit, debit to prepaid payments as well as access cash (ATM).
The company is also involved in the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. It is present in more than 200 countries.
Furthermore, Visa owns and operates VisaNet, a processing platform that enables to process transactions, services, primarily authorization, clearing and settlement and services such as Visa Debit Processing and Visa Processing.
The company is made up of a set of brands that include Visa, Visa Electron, PLUS and Interlink.
Visa has one of the widest economic moats and is permanently investing to ensure that cardholders use its credit cards and merchants accept them. Apart from investing, it also has an army of banks on its side for such purposes.
In terms of revenues, they primarily come from fees paid by customers based on payment volume, processing of transactions and other related services.
Revenue can be classified into four segments:
Service revenues: Earned from customers for their participation in card programs carrying marks of the Visa brand.
Data Processing revenues: Come from authorization, clearing, settlement, transaction processing services and other maintenance and support services facilitating transaction and information processing among customers globally and Visa Europe
International Transaction revenues: Assessed to customers on transactions where the cardholder s issuer country is different from the merchant's country.
Other revenues: Consist primarily of optional service or product enhancements such as extended cardholder protection and concierge services, cardholder services and fees for licensing and certification.
This generally description of the company inevitably makes investors think about whether it is a pick and for such purpose, they need to analyze the reasons:
1. The electronic forms of payment such as card payment transactions have brought significant opportunities for the business’ growth;
2. The electronic processing systems are built with redundancy and have backup procedures to guarantee that operations do not drop in the event of interruption;
3. The acquisition of CyberSource has extended Visa’s exposure in eCommerce industry. This will boost growth and increase the client and merchant base across the world;
4. Visa is exploring new opportunities and is investing in new processing and service platforms to make payment methods more convenient and innovative;
5. Visa’s eCommerce strategy is highly complemented by the acquisition of PlaySpan and Fundamo along with other strategic alliances with Isis, Monitise, CashEdge and Fiserv.
6. Visa has a leading position in the card industry in terms of payments volume, total transactions and total number of cards in circulation. This definitely involves a double-digit-growth, particularly in the last two years.
7. Visa enjoys a strong cash and available-for-sale investment position together with a free cash flow reserve that generate a risk-free balance sheet.
These are just some of Visa’s advantages. There are much more. There is no doubt that there are some risks that challenge Visa too and are worth pointing out.
Unfortunately Visa is allegedly facing several lawsuits on anti-competitive and anti-consumer practices. Although it is hard to estimate their costs, the amount may involve billions of dollars.
Another risk that Visa faces is regulation, which can hinder its business model. Should government interfere in the company’s operations, the downside can be severe.
Least but not last, competition is pressuring because it is trying to get a share of the market and Visa cannot neglect this fact.
Setting aside the advantages and disadvantages of the company, it is worth turning to the actual figures.
To start with, transactions from CyberSource have escalated by 36% in fiscal year 2011 vis-à-vis the 32% increase in 2010.
Despite the challenging regulatory environment today, debit cards, Visa’s prime business, has had an 8% growth in 2009 that then moved to 18% in 2010.
Moreover, the company increased its quarterly dividend by 19%, 20% and 47% in fiscal years ended 2009, 2010 and 2011, respectively.
What really provides a solid view of the company is that it has a $3 billion five-year revolving credit facility but no borrowings; a $3.9 billion operating cash flow and no long-term debt.
Earnings grew 29%, outperforming the 20% outlook.
Every investor knows that good results have to go hand in hand with good managing strategies. But is this the case with Visa?
The management team began to be assembled during the reorganization process of Visa’s predecessor entities and regional associations, which derived in only one entity listed in the stock exchange.
Although some of the senior managers have never worked for the card industry and do not have wide experience running companies like Visa, it seems that they are working hard to learn. Indeed, they are trying to show shareholders that they can work together, face Visa's challenges and deliver good results. The last quarter performance shows that they are doing well.
Top managers are strangers to one another but there is some good news. Joseph Saunders, the CEO, is a card industry veteran who has worked for Providian and Washington Mutual's credit card segment until he started running Visa.
There is no doubt that management will consolidate with the passing of time. Visa is a very solid company and the growth in revenues will certainly help.
Visa is a company that largely benefits from a rise in demand, meaningful international exposure, and high barriers to entry and pricing power.
Visa shares currently trade at 16.0x. On a price-to-book basis, they trade at 3.0x, a 52% discount to the 6.2x industry average.
ROE is of 13.6%, dramatically below the industry average of 57.7%. The annual common share annual dividend is $0.88, which is considered secure and implies a total return of nearly 5.3%
Jim Van Meerten, an adviser to Marketocracy Capital Management gives his opinion: “I think now is a great time to enter Visa into your portfolio. Volumes are bound to increase as consumers spend less cash and swipe more plastic. In the long run, although consumers will be vocal about fees in the end they will just keep swiping away."