Visa: A Great IPO

| About: Visa Inc. (V)

Some IPO's like Facebook (NASDAQ:FB) and Groupon (NASDAQ:GRPN) are highly anticipated, while others that are not so sexy and glamorous can fly under the radar. Many times, it can the latter as opposed to the former that turn into the big winners over the years.

For the most part, I avoid IPOs like the plague. If you are not a part of the initial offering, chasing IPOs is almost always a fool's game. How many times have you seen them trade way above the offering price on their debut, only to fizzle out over the next several weeks or months?

You have to remember that companies rarely come public at an undervalued price. Instead they are trying to raise as much money as the marketplace will bear. In addition to this, valuations are difficult to do on new offerings. I prefer for companies to do their IPO and then establish a track record as a publicly traded company. This may take a year or two.

Visa (NYSE:V) came public back in March of 2008 without a lot of fanfare, and has established an excellent track record since then. If you remember, 2008 was not real good year for a financial companies to go public. The financials were in the eye of the hurricane that year.

Visa came public at $55, ran up to about $90, and then the market came tumbling down during the financial crisis. Visa finally bottomed in February 2009, and it has been regularly hitting new highs ever since. With the stock at a current price of $108, Visa has almost doubled since its IPO.

Visa has just reported earnings that have beat street expectations once again. Their revenues grew by 14% in the latest quarter, while earnings grew by 21%. Earnings have been growing by an average of 46% per year over the last five years, which is extremely good for a large-cap stock like Visa.

Ironically, Groupon has also just reported earnings in the after hours. Groupon has now been public since its IPO back on November of last year. Groupon came public at $20 per share and it is trading at $24.58 in the after hours after a disappointing earnings report. In fact, Groupon does not even have earnings yet. As I stated earlier, it can be very difficult to value freshly minted stocks, especially those with no earnings.

Let's revisit Groupon at some time in the future, if and when they start turning a profit and we can get some guidance on earnings growth going forward. I am not yet sold on their business model, but let the company prove me wrong.

Instead, let's evaluate Visa which now has a track record of over three years and continues to put up big numbers for its investors. Let's begin by recapping Visa's performance as a public stock, next do a valuation on the shares, and then establish a buy, sell, or hold rating on the stock.

First let's look at Visa's performance:

(Click to enlarge)

Data From Best Stocks Now App

As you can see, Visa has established a very respectable track record as a pubic company. Over the last three years, it has delivered a total annual average return of 25.9% per year, while the S & P 500 has delivered an average of 15.8% per year.

Over the last twelve months, Visa is up 46.5%, while the S & P 500 is up a paltry 1.9%. Not bad for a large-cap stock that currently has a market capitalization of $88 billion! Sure beats a lot of other lumbering large-caps that are way past their prime and growing in the single digit range these days.

Let's take a look at a current chart of Visa:

As you can see, Visa currently has a very powerful stock chart and the stocks is hitting new, all-time highs. Now, to me it makes little sense to just buy a stock because it has been performing well, and it has a good stock chart. I know a lot of you will disagree with me, but what about valuation? Does it not make more sense to also buy such stocks when they also still make sense from a valuation point-of-view?

Let's take a look at a current valuation of Visa. According to the 32 analysts that cover Visa, the consensus five-year growth rate going forward is about 19% per year. Here again, this is very good for an $88 billion dollar company. The current forward PE ratio of Visa is 16.93. This currently makes for a fairly favorable PEG ratio of 0.89. That is a good start.

Now let's compute a five year target price for the shares. We begin with consensus estimate of $6.80 per share for the next fiscal year. Boy, wouldn't Groupon like to have $6.80 per share in earnings next year! Let's next extrapolate those earnings out by 19% per year over the next five years. This gets us to potential earnings of $13.64, five years from now. Now, a lot can happen between now and then, but stocks trade on future expectations, and right now these are the expectations.

With $13.64 in earnings, what PE multiple does a stock like Visa deserve? Visa has a current PE ratio of 19 and it has ranged between a 16-21 range over the last four quarters. I think that you will see some multiple contraction as the stock decelerates from its current growth rate into a 19% growth rate over the next several years.

I am using a fairly conservative multiple of 14.5 on those future earnings. This is in line with similar stocks like American Express (NYSE:AXP) and Mastercard (NYSE:MA). This gives me a target price of $197.73 five years from now. I have to also add in the effects of a dividend yield of 0.8% per year over the next five years. In my opinion, Visa still has 86.5% upside potential over the next five years.

(Click to enlarge)

I like to buy stocks that have 80-100% or more upside potential over the next five years. I also like stocks that have been performing well against the overall market and its peers. This tells me a lot about management and helps guide my expectations in coming years.

I still like Visa a lot right now. Despite the big move in the share since its IPO, it still possesses all of the attributes that I like to see in a stock. It should be noted that Visa is for investors that like fairly conservative large-cap growth stocks. This is not an aggressive growth stocks, nor is it an income oriented stock. If you have room for about 25 good, conservative growth stocks on your roster right now, you may want to consider shares of Visa.

Out of 2,695 stocks that I follow, Visa currently comes in at number 164 and earns an overall grade of B+. This is very good for an $88 billion dollar large-cap stock. Visa is a BUY!

(Click to enlarge)

Disclosure: I am long V.