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Summary

  • We pitch two companies from the credit services sector, Visa and Amex, against one another in the latest instalment of our Head-To-Head series.
  • The article focuses on the relative strengths and weaknesses of Visa and Amex based on business performance and sustainability/dividends/forecasts.
  • It ends with discussion of the current valuations of the two companies, and details whether Visa represents good relative value at current price levels.

Visa Background

Visa (NYSE:V) is a payments technology company based in San Francisco, California, that operates as a retail electronic payments network worldwide. The company facilitates commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses, and government entities. It owns and operates VisaNet that is involved in the authorization, clearing, and settlement of payment transactions; and provision of fraud protection for account holders and assured payment for merchants. The company also offers a range of issuer processing services for participating issuers of Visa debit, prepaid, and ATM payment products. The company offers its services under the Visa, Visa Electron, Interlink, and PLUS brands.

Team Money Research Rating

Our investment philosophy is to focus on company fundamentals and identify stocks that are displaying strong business performance, that operate sustainably and that pay a decent, well-covered dividend.

We score each company relative to the other on the following criteria within each of our two main buckets:

Business Performance

  1. Return on equity
  2. Return on assets
  3. Operating margins
  4. Quarterly revenue growth
  5. Quarterly earnings growth

Sustainability/Dividends/Forecasts

  1. Debt to equity ratio
  2. Interest cover
  3. Dividend payout ratio
  4. Forward yield
  5. Quarterly EPS growth forecast

Once we have scores for the two buckets, we can then assess whether a company represents good value based on the current prices of the two stocks. We use the following criteria to assess valuations on a relative basis.

Valuation

  1. Forward price to earnings ratio
  2. Price to book value ratio
  3. Enterprise value to revenue
  4. Price to 3 year average free cash flow ratio
  5. 5 year price to earnings growth ratio

So, for example, a company that scores well compared to its rival on the first two buckets (business performance and sustainability/dividends/forecasts) and that is undervalued relative to its peer (based on the third bucket: valuation) could outperform its competitor going forward.

The table below highlights the data that we will use to score Visa and Amex (NYSE:AXP) for the first two buckets.

Stock

Visa

Amex

Business Performance

Return on equity

20.01%

28.07%

Return on assets

13.31%

3.57%

Operating margins

62.67%

26.42%

Quarterly rev. growth

6.90%

3.20%

Quarterly EPS growth

25.80%

11.90%

Sustainability/Dividends/Forecast

Debt to equity ratio

N/A

285.81%

Interest cover

N/A

7.40

Dividend payout ratio

17.00%

18.00%

Forward dividend yield

0.80%

1.10%

Quarterly EPS growth forecast

4.76%

-0.73%

We then score each company relative to its peer based on the above data, with points being awarded as follows:

1st place: 10 points

2nd place: 0 points

Below are the scores for Visa and Amex:

Stock

Visa

Amex

Business Performance

Return on equity

0

10

Return on assets

10

0

Operating margins

10

0

Quarterly rev. growth

10

0

Quarterly EPS growth

10

0

Sustainability/Dividends/Forecast

Debt to equity ratio

10

0

Interest cover

10

0

Dividend payout ratio

10

0

Dividend yield

0

10

Quarterly EPS growth forecast

10

0

Total Score

80

20

As you can see, Visa easily beats Amex into second place by a score of 80 points to 20. What really impresses us about Visa is its consistency. Firstly, it has no debt, a point that we feel is often overlooked by many investors; although interest rates may stay low for a little while longer, they will not stay low indefinitely. The fact that Visa is able to rely on equity rather than debt is a big plus for us as longer term investors, since it means the bottom-line should not be hit by higher interest charges going forward.

Given that Visa has no debt, we'd expect it to struggle on profitability versus a highly indebted peer like Amex, which has a debt to equity ratio of 285.81%. However, Visa scores extremely well on profitability measures such as return on equity and return on assets, only losing out on the former because of a strong showing from Amex. Meanwhile, quarterly growth numbers are very strong for Visa - both last quarter and for the next quarter, where the company is expected to increase earnings by 4.76%. On this particular metric, Amex disappointed and showed just how well sector peer, Visa, is performing.

In addition, a low payout ratio for both companies means that relatively low yields have the scope to increase rapidly in future, although utilizing capital for internal growth opportunities (as they are doing right now) seems sensible.

Of course, we remain impressed with Amex, and were it not for the strength of its opponent, it would generally have scored well. Its profitability and recent growth were impressive, although we'd like to see debt levels come down to provide the company with greater headroom when making interest payments.

Valuation

So, we feel that Visa has performed very strongly in the first two buckets and, as such, should trade at a significant premium to its sector peer, Amex. Let's see if it does.

Stock

Visa

Amex

Valuation

Forward price to earnings ratio

21.31

15.67

Price to book ratio

5.09

5.02

EV/revenue

11.01

4.38

PEG

1.44

2.02

Price to free cash flow ratio

39.20

13.55

While Visa does trade at a substantial premium on a number of measures, including the forward P/E, EV/revenue and price to free cash flow ratio, we feel that there could still be good value in the company on a relative basis. Indeed, Visa's PEG ratio is highly attractive at 1.44, which is lower than Amex's 2.02, while the two companies' book values are broadly similar at 5.09 (Visa) and 5.02 (Amex). So, while a P/E premium of 36% seems large, we feel that Visa deserves to trade on an even higher premium as a result of its stunning performance in the first two buckets. As a result, we believe that Visa could outperform its sector peer going forward.

Conclusion

Visa is an exceptionally high quality company that we believe offers good value at current levels. It scored very highly on the Team Money Research rating system, comfortably beating its sector peer, Amex. It also appears to be relatively undervalued at current levels since, although it trades at a premium on three of our five valuation criteria, we believe the premium should be higher. In addition, it trades at a discount on one of the criteria (PEG ratio) and is evenly matched in terms of the price to book ratio. As such, we feel that Visa could outperform its sector peer, Amex, going forward.

Which stocks do you want to see go head-to-head against Visa in future articles? Please comment below!

Source: Visa Easily Wins This Head-To-Head Battle