Over the past 10 years, Visa Inc. scored what mutual fund guru Peter Lynch would call a 10-bagger, a stock price that that saw its price increas more than 10-fold:
As we see on the right side of the chart, the price recenlty pulled back as the market responded to the economic crisis resulting from Covid-19. However, although the price is at what I consider bargain levels, it’s still expensive on the basis of its earnings-based discounted cash flow (DCF) model. The GuruFocus DCF calculator shows Visa being overvalued by 12.89% as of May 5. Similarly, its price-earings ratio is still high at more than 32, though this is down from around 38 in February.
The current economic conditions make it logical for investors to be less confident in their investments. For Visa, its cards are being used less often to buy tickets for air travel, meals at restaurants and much more. This has had an effect, as Visa noted in its Q2 2020 earnings report: “COVID-19 impacted both card present and card not present cross-border travel related spending, initially in Asia during February, and then globally and more significantly in March as the outbreak spread to the rest of the world.”
Some might also expect the company to be affected by an anticipated spike in consumer defaults and bankruptcies. However, I believe this should not be a concern to investors because it's banks that backstop credit card debt, not processors like Visa or its rival Mastercard Inc MA.
The question is, if we Visa at the current price intending to hold for the longer-term, will it continue to be the power stock that it has been over the past decade?
The company’s 2020 investor presentation insists it has plans to accelerate growth:
Over the past decade, its median growth in earnings per share (without non-recurring items) was 21.75%.
To systematically analyze Visa, I will utilize the Macpherson model, an initial screen used by fund manager and GuruFocus contributor Thomas Macpherson. The conservative investing model looks for a competitive advantage (moat), excellent financial strength, high profitability and a reasonable valuation.
Moat
There are two criteria for a company to have what the Macpherson model considers a wide moat: median return on capital (ROC) greater than 15% and return on tangible equity (ROTE) greater than 15% over the past 10 years.
- ROC: Visa’s median ROC has been 20.82%, above the 15% required.
- ROTE: The median ROTE over the past decade was 126.33%, much higher than the 15% hurdle rate.
Based on these two figures, we can comfortably say that Visa has a strong competitive advantage in the payments processing industry. That’s backed up by its dominant market share.
Financial strength
In this section, there are also two criteria: the cash-debt ratio, which should be at least 100, and a GuruFocus finanical strength rating of at least 9 out of 10:
- Cash-to-debt: As the screenshot above shows, Visa does have more debt than cash, cash equivalents and marketable securities on hand, and therefore does not meet the mark.
- GuruFocus rating: The score of 6 out of 10 does not meet the requirement.
According to the model, Visa’s financial strength is not acceptable. However, if we check the green bar next to it and under Industry, we see that its cash-debt ratio is better than 67% of the 432 public companies in the credit services sector. Therefore, I am comfortable with not giving the company a failing grade on its financial strength.
Profitability
On this measure, we’re looking for a GuruFocus profitabilty rating of at least 9 out of 10, and Visa hits that mark with a score of 10 out of 10:
Valuation
The Macpherson model also filters out stocks that sell at or above intrinsic value. This is the case for Visa, which, as noted above, is priced at nearly 13% above its intrinsic value based on several valuation methods. However, this is also one of the few times in the stock’s recent history when the price actually dropped.
Ownership
What do the investment gurus think of Visa? According to GuruFocus data, 32 gurus have positions in the company, which is a strong showing. Ken Fisher (Trades, Portfolio) of Fisher Asset Management held the largest position, with more than 20 million shares at the end of the first quarter. Frank Sands (Trades, Portfolio) of Sands Capital Management owned just over 15 million, while Warren Buffett (Trades, Portfolio) of Berkshire Hathaway BRK.ABRK.B owned 10.5 million shares.
At the same time, though, gurus have been trimming their positions in the company for the past few years, as shown in this GuruFocus chart:
Institutional investors held 46.41% of the total outstanding shares as of May 5, while Insiders held just 0.08% of shares, including Chairman and CEO Alfred F. Kelly, Jr. with 141,000 shares.
Conclusion
In my assessment, Visa Inc. is a powerhouse of a company. It will likely show weaker results in the next quarter or few quarters, but once consumers and businesses get back on track, it should get back to its profitable days.
While the stock is no bargain for value investors, it is currently cheaper than it has been in some time. For ambitious investors looking for growth, this could be the time to put Visa under the microscope.
Disclosure: I do not own shares in any of the companies listed in this article and do not expect to buy any in the near future.
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