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Summary

  • Visa's fall to $200 per share ignores the quality of the company's balance sheet and future growth prospects.
  • Visa is still growing revenues by 11% annually once you recognize the effects of currency translations.
  • The company is still on pace for nearly 15% annual earnings per share growth, due to 10-11% organic growth plus 3-4% annual growth from buybacks.

After Visa (NYSE:V) revised its 2014 projections downward after reporting earnings after Thursday's market close, investors reacting to the news sent a quick, short-term signal: they didn't like what they were hearing. After Visa's management indicated that revenue would only be growing at 8-9% annually (it's really growing at 10-11% on a constant currency basis, but the stronger dollar is expected to take two percentage points off of this year's figures), the price of the stock fell $10 (almost 5%) to the $200 mark.

That kind of fall tells us one thing: the share price fall to $200 after the earnings release is a classic case of short-term thinking that does not adequately adjust for the company's pristine balance sheet or long-term earnings power.

And when I say "pristine" balance sheet, I'm not using that word as hyperbole. Visa is entirely free of the encumbrances that slow down the long-term earnings per share growth rates of many other excellent blue-chip stocks. How much preferred stock does Visa have? None. What pension obligations does Visa have? None. How about total debt? None.

The credit card giant is in the enviable position of having hardly any claims on its rapidly growing profits. Visa's current dividend amounts to $0.40 quarterly, or $1.60 committed to shareholders annually. Visa reported earnings per share of $2.20 yesterday, meaning that the profit-generating capacity of the firm amounts to $8.80 per share. The dividend only takes up 18% of profits, meaning that Visa can currently use $0.82 on every dollar in profit to invest for future growth, buy back stock, or pad its $2 billion in cash assets.

Visa is repurchasing about $1.1 billion worth of its stock per quarter, which works out to $4.4 billion annualized. The current short-term dip in share price will amplify the effects of the company's buyback program, as the market cap now sits at $126 billion. In other words, at current prices, Visa is set to retire 3.5% of its outstanding stock per year.

This is a nice tailwind for long-term investors looking to benefit from a company that has a high organic growth rate that is also taking actions to amplify its earnings per share figures with a robust buyback program. For instance, Visa just reported $2.20 in quarterly profits, compared to $1.92 this time last year. That's an earnings per share improvement of 14.58%. However, about three percentage points of that are due to the company's excess cash flow being used to retire shares. The core business is growing profits at around 11% annually, but the long-term owners experience wealth creation in the 14-15% annual range due to shares getting retired (to get a feel for the long-term power of Visa's buyback, note that the company had 774 million shares outstanding in 2008 and has 636 million outstanding today, putting Visa on pace to retire one out of every five shares in existence between June 2008 and December 2014).

The disappointment over Visa's earnings figures seems generally misguided and overly focused on the short term. I think it's funny that people cite problems with Russia as a reason to be concerned about Visa, when you can see that the company is experiencing 29.7% annual growth when you open up your analysis to measure all of Visa's performance in central and eastern Europe. This time last year, Visa's earnings power sat at $7.60 per share. Now, that figure is up to $8.80 per share. The company is valued at only 22x current profits, and it has grown at 15% compared to where we are at in April 2013. Is this really performance to get upset about?

The company's net profit margins are over 50%. The company is still growing at 7-9% annually in the United States. When you look at Latin America, or non-Western Europe, you see growth rates well north of 20% annually. The company has no debt of any kind, and is retiring blocks of stock to stimulate three to four percentage points worth of earnings per share growth. Even with negative currency fluctuations factored in, the revenue growth is still in the 10% ballpark. The balance sheet couldn't get better, and the company has a formula for 14-15% annual earnings per share growth (10-11% organic growth plus 3-4% in buybacks). As the current valuation hovers towards 20x profits, it could be an intelligent time to start thinking about backing up the truck and buying some shares if you have a 10+ year time horizon.

Source: Visa's Fall To $200 Is Classic Short-Term Thinking