Visa: Nowhere To Go

| About: Visa Inc. (V)


Visa continues path of slow growth matched with a high valuation.

The Visa Europe purchase will pressure earnings and margins in the short-term.

The stock will find a difficult time justifying a higher price this year.

Quarter after quarter, Visa (NYSE:V) offers investors meager growth. The market though shakes the numbers off and sends the stock higher.

This quarter was no different. The company offered the market 5% revenue growth and 7% operating income growth and the stock took off. The question is where can the stock go from here.

Visa has two big hurdles to over come in the short term for the stock to see justified gains. The stock trades at a high PE multiple and the Visa Europe transaction will wreck the operating margins and income growth. The combination should trip up the stock.

The stock trades at over 25x current year EPS estimates despite limited growth. Visa now trades at a higher multiple than competitor MasterCard (NYSE:MA) that doesn't have the integration risks of a big purchase.

V PE Ratio (Forward) Chart

The recently reported EPS growth for Visa was only 10% and the Visa Europe purchase will impact numbers in the short term. The company borrowed $16 billion for a transaction that won't complete in the current quarter. The quarterly interest cost is $125 million or $0.04 per share.

The impact is clearly see on the EPS estimates were analysts only forecast minimal growth in the March quarter and actually a negative print in the June quarter. These are not the numbers of a stock that should surge 5% to a forward PE multiple of over 25.

At the same time, my previous research of the Visa Europe deal highlighted how the integration of the European operations would damage the high operating margins. Sure Visa will eventually bring those numbers up, but Europe is a different beast. The European operations currently have a operating margin of only 10% in comparison to the substantial 60%+ at Visa.

V Operating Margin (<a href=

In fact, part of the margin size for Visa is the royalty payment the company gets from the European operation.

The key takeaway is that Visa remains highly valued despite going through a period of lower margins and a lack of profit growth. Visa Europe may end up being a long-term positive for the stock, but in the short-term the stock isn't going to act well when the market sees a headline print of declining earnings next quarter.

The stock has nowhere to go this year with negative pressures capping the current price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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