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Manning & Napier Advisors Bet on this Stock, Should You?

July 28, 2014 | About:
ovenerio

ovenerio

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In this article, let's take a look at Visa Inc. (V), a $133.83 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. On June 30, this investment advisory firm added the stock at an average price of $209.06 and currently holds 797.050 shares.

Powerful Network

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. Payments volumes which are a key driver of Visa's business models, increased by 9% in fiscal year 2013 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.

The Future

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, also constitute a threat as new competitors attempt to manage the payment process, which can develop new ways to authenticate payments.

Principal Risk

The largest risk to Visa is related to regulation and litigation. For example, the Dodd-Frank Act limited debit interchange fees in the U.S. in 2010, and the European Union has taken the first steps toward new regulations covering interchange and other aspects of the payment system.

Dividend Policy

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. 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.

Revenues, Margins and Profitability

Looking at profitability, the revenue growth by 5.3% has outpaced the industry average. Earnings per share increased by 15.4% in the most recent quarter compared to the same quarter a year ago. During the past fiscal year, the firm increased its bottom line by earning $7.58 vs $3.13 in the prior year. This year, Wall Street expects an improvement in earnings ($9.00 vs $7.58).

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

18.53

AXP

American Express Co.

27.49

MA

MasterCard Inc.

41.64

 

Industry Median

13.17

The company has a current ratio of 18.53% 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) and MasterCard Inc. (MA) 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.

1406557477064.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 24.6x, trading at a discount compared to an average of 15x for the industry. To use another metric, its price-to-book ratio of 4.9x indicates a premium versus the industry average of 1.59x while the price-to-sales ratio of 10.9x is above the industry average of 2.67x. At that PE the stock is relatively undervalued and seems to be an attractive investment relative to its peers.

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 $34.890, that is a 28.4% compound annual growth rate (CAGR).

1406557411032.png

Final Comment

As outlined in the article, Visa's business model, as well as it´s established network and brand and healthy balance sheet make me feel bullish on this stock.

Visa profitability is driven by 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.

Hedge fund gurus Paul Tudor Jones (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), George Soros (Trades, Portfolio), Jim Simons (Trades, Portfolio), Chuck Akre (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio), Frank Sands (Trades, Portfolio), Tom Russo (Trades, Portfolio) and Murray Stahl (Trades, Portfolio) added this stock to their portfolios in the first quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned

About the author:

ovenerio
We provide independent fundamental research and hedge fund and insider trading focused investigation.

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