Visa: Keeps On Charging Ahead

Aug. 1.13 | About: Visa Inc. (V)

Visa, Inc. (NYSE:V), the world's largest retail electronics payment system, traded down more than $17 on the news of an adverse court ruling. The judge in the case ruled Congress overstepped its bounds in setting the debit card processing fee at 24 cents. The plaintiffs of the case, led by a consortium of different retailers, are looking for the fee to go much lower. The uncertainty caused by the ruling offers an excellent opportunity to invest in this great company. The article below will detail my thesis for an investment in V.

The primary reason for an investment in V revolves around its unique business model. V owns a widely used payment system that generates a significant amount of payment traffic. V collects a processing fee on every transaction without accepting any credit risk. The credit/debit cards that are accepted on the payment networks are issued by financial institutions that license the V name. It is the financial institutions that accept all the credit risk. I basically consider V to be a toll collector in the ever-expanding world of cashless transactions. The uniqueness of the business model and, in my view, near-impossibility to duplicate it affords V a wide and defensible moat.

Year

2008

2009

2010

2011

2012

Cash Flow per share

2.5

3.22

3.86

5.34

6.61

Capex per share

.54

.40

.29

.67

.46

Earnings per shares

2.25

2.92

3.91

4.99

6.2

Dividends per share

.21

.44

.53

.67

.99

Net profit margin

27.1%

32.0%

36.8%

39.7%

40.3%

Shares outstanding

774 million

758 million

836.87

812.95

810.61

Click to enlarge

The table above shows some key metrics that I find very impressive. As a business, V is a cash flow machine with miniscule capital expenditure requirements. The ability to generate a tremendous amount of free cash allows the company to reward shareholders handsomely. V returns capital to shareholders via a combination of dividends and buybacks. V has more than tripled its dividend since 2008, which Is an excellent start. I believe V will eventually become a dividend aristocrat due to the low capital needs of the business along with the steadiness of its revenue base.

I like to look at net profit margin when determining to invest in a company. I find that companies that have high and rising net profit margins to have significant pricing power. I especially look for companies that can continue to grow this number irrespective of economic conditions. V has done an admirable job in this department, with net profit margins up almost 50% since 2008. While I don't expect to see this type of gain going forward, the fact that management is able to consistently expand its net profit margin indicates the outstanding job they are doing controlling expenses. I believe V management team led by Charles Scharf is outstanding and will continue to deliver excellent results well into the future.

A point was raised during the last conference call that Visa Europe owns a put that can be exercised. By exercising the put, V would have to purchase the European branch for an undisclosed sum. Management is confident they would be able handle this transaction; however, they wouldn't say how, due to the speculative nature of the scenario. V's balance sheet is void of any long-term debt and, in my opinion, wouldn't have any issues raising debt in the capital markets to complete the acquisition. An acquisition of Visa Europe would further enhance V's growth opportunities, so I would view this as a positive.

The federal case that led to yesterday's stock sell-off adds some uncertainty into the mix. The debt transaction fee was capped at 24 cents after Congress originally wanted to set it at 12 cents. The bank lobby successfully pushed for a higher cap and won the day. The retailers predominantly are looking for the cap to be lowered again. An expected deal is at least by most estimates two years away, and in the interim the current 24 cents will stay in effect. It is my belief that deal will be struck at most likely 20 cents, which should placate all sides.

In conclusion, V is a wide moat company with a great franchise. V is run by an outstanding management team that consistently controls costs and raises net margins. The stellar job done by management allows V to reward shareholders further, via dividends and buybacks.

Disclosure: I am long V. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.