Visa (NYSE:V) is a US listed business services company that operates a worldwide retail electronic payments network. Visa is a S&P 500 company and has a market capitalization of $101 billion.
The stock has performed very well over the course of the year being up 23% year to date. The total 52 week performance stands at 42%. Given this performance and run up in price, investors ask whether Visa is still a Buy at $124, considering the recent downgrade by UBS, which issued a Sell rating and a price target of $113 a share.
First off, uncertainty hung over shares of Visa, Mastercard (NYSE:MA) and American Express (NYSE:AXP) over the last couple of months as investors awaited a settlement with merchants over transaction fees. Last Friday, this settlement was finally reached at $7.25 billion.
This settlement is certainly going to hit margins and earnings of all involved payment processing companies going forward. The positive for investors is, however, that uncertainty has been removed from the sector and Visa common stock. Despite an expected margin impact and threats from declines in global consumer spending due to a weakening global economy (which is the primary reason for UBS' downgrade), the company posts very attractive margins and can absorb a temporary setback in terms of revenues and earnings: Visa achieves a 43% net profit margin and a 15% return on equity. Given these high ratios I support the management's decision to internally invest cash flow and keep dividend payments low. Currently, investors get a 0.7% dividend yield which should not be instrumental in the purchase of Visa stock.
With a P/E multiple based on forward earnings of 17.5, the company is not exactly cheap, but still undervalued compared to its earnings potential and profitability metrics.
Assumptions that I use in my valuation model are: An above average 5 year EPS growth rate of over 44%, which will subside to 15% over the long-term based on competitive pressures, similar expense ratios with the merchant settlement treated as one-off, and a future profitability that matches past profitability. I estimate the company to earn $7.50 per share in 2013. This equals about the high estimate of analysts for the 2013 EPS. I also believe, that because of the oligopolistic structure of the industry and the accompanying high book value growth rates, that Visa (and Mastercard) deserve premium multiples of 20. In this regard, Visa has an intrinsic value of $150 and has over 20% upside potential from Friday's close.
Risks associated with Visa are a worsening global economic picture that will hit global consumer spending. I personally estimate there is only a 5% chance for a new recession in the US - the key revenue market for the industry. Regulatory risk is another aspect investors should be aware of. A Republican president is likely to impose restrictions on financial regulation which could help Visa's stock price as well.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.