After reaching a 2014 high of $235 in January, Visa Inc (NYSE:V) has now fallen 15% to reach $198. The recent trigger for this decline was the company's Q1 earnings report, where the company beat EPS expectations but guided down on revenues for 2014. Click here for Seeking Alpha's coverage of the Q1 report.
This article presents a few reasons why Visa's tumultuous start to 2014 might be a good chance for long-term investors. Let us get into the details.
Valuation, Earnings and Future:
Visa's trailing PE now stands at 25, which is well below the five-year average of 29 as can be seen here. Earnings are expected to grow at 17%/year for the next 5 years, and this gives Visa a PEG of 1.3, which is not too bad considering the terrific growth prospects left. As a comparison, MasterCard Incorporated (NYSE:MA) has a PEG of 1.4.
Even the recent Q1 earnings beat expectations by 16% and this was totally ignored as the guide-down took precedence. As can be seen below, Visa has a history of handily beating earnings expectations.
(Source: Yahoo Finance)
It is still too early for plastic cards to be done away with. Given that security is absolutely paramount in this business, it is very hard to imagine customers moving away from the security that Visa and MasterCard Incorporated offer for their transactions. Visa's current position is so dominant that it could take decades to unseat it, even if there is a paradigm shift toward mobile payments and Visa does nothing about it (highly unlikely). In 2013, Visa had 60% market share in world-wide purchases transactions and nearly 73% market share in debit card transactions.
- 31 analysts on Yahoo Finance have an average price target of $253.79.
- 35 analysts on Marketwatch.com have an average price target of $252.24.
- Trefis.com has a price target that is very close to the current market price.
- If those price targets hold true, the downside seems minimal but the upside is nearly 27%.
Yes, a yield of 0.80% is nothing to shout about but that is in fact the highest yield for Visa in the last five years, as can be seen here. An important factor to keep in mind is that Visa has increased dividends at a scorching rate of 31%/year over the last 5 years. Of course, this pace cannot continue forever but the strong dividend growth rate combined with zero debt, great cash flow and buybacks should convince investors about a nice yield on cost a few years down the line. Investors will almost certainly see another massive dividend increase in October.
The table below shows the ballooning yield on cost for investors who buy Visa here, assuming the company increases the dividend by 15%/year for the next five years. This is aggressive but is not certainly beyond Visa's reach. We believe the company will actually grow dividends at a much faster rate but let us error on the side of caution and use a conservative number. A near 2% yield on a stock that is still believed to be in its growth phase is not a bad bargain.
(Source: Current dividend and share price data from Yahoo Finance.)
Insider Buy: Visa saw a rare insider buying, with a director recently buying shares in the open market. This is not a game changer but is worth keeping in mind at least. As an added bonus, investors get to buy the shares at a 10% discount to where this director bought recently.
Technical Reasons: In today's market it is very hard to find a quality stock that is not overbought, let alone being oversold. But that is exactly what Visa is presenting to investors right now. The Relative Strength Index [RSI] is now at 31 as shown below. A stock with a RSI below 30 is considered oversold.
Also, the 6-month chart below shows the stock bouncing up between $195 and $200 multiple times.
(Source: Yahoo Finance)
Conclusion: So, there you have some reasons Visa is looking attractive here. The recent sell-off is a classic case of ignoring the long-term prospects due to short-term gyrations. What do you think? Are you willing to buy Visa here? Please leave your comments below.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Business relationship disclosure: The article was written by Tradevestor's analyst. Tradevestor is not receiving compensation for it (other than from Seeking Alpha). Tradevestor has no business relationship with any company whose stock is mentioned in this article."