Visa Stock: Buy with Caution

After reporting earnings after the close Monday, Visa Inc. (V) traded in a schizophrenic pattern Tuesday, ending the day at a new record high. The stock closed at $80.88 which is 84% above the offering price for those of you keeping score at home. This was after gapping down more than three dollars shortly after the opening bell. Traders initially had a bit of trouble deciding whether the earnings report was net positive or negative, but by the end of the day, it appears Wall Street is happy with the numbers.

Digging into the statistics, the company reported pro-forma earnings of 0.52 on revenues of $1.5 billion dollars. Management said that the strength was broad with contributions from service fees, data processing fees and international transaction fees. However, a Wachovia analyst pointed out that the results were primarily driven by price increases which originally took place in June and so have yet to factor into year over year numbers, as well as lower than expected incentive fees. It would be much more impressive to see strength due to a strong uptick in transaction volume, but the higher revenue is still a positive.

One of the issues that makes Visa especially difficult to analyze is that the company reports operational performance on a trailing quarter basis. So, while the report was for the second quarter (ending March 31), many of the metrics are only available for the quarter ending Dec 31.

Specifically, the payment volume was $681 billion which is up 19% over last year, total cards in circulation amount to 1.6 billion which is up 16%, and total transactions processed were 11 billion up 16%. However, since these figures are over 3 months old, it is difficult to see what kind of trends have already begun surfacing in a weakening economy which included a major financial institution failure and an unprecedented decline in consumer confidence.

The tone of the conference call appeared constructive with management cautiously optimistic as to the prospects for the rest of the year. While pointing to a weakening economic backdrop and possible slowdown in the second half, the company is still expected to meet its long-term stated goals:

• Revenue growth of 11-15%
• EPS growth of 20% or better
• Operating margins in the low 40% range
• Annual free cash flow above $1 billion

It is also noted that the company processes an estimated 40% of volumes from non-discretionary spending, which should help to insulate the company from a weakening economy. Similarly, 36% of the cost structure is characterized as variable meaning management has some element of discretion and could pull back if revenue were to begin to lag expectations.

Speaking of discretionary costs, advertising expense came in a bit weaker than the Merrill Lynch analyst expected. While reducing this cost had the effect of beefing up the margins, advertising will almost certainly pick back up in the second half as the Olympic events will be a strong venue for the company to market its brand. Investors are likely pricing in a strong period during the Olympic games and it will be interesting to see how the global economic picture fits into the scenario. In the meantime, the stock is trading at a healthy multiple and has had a very strong run since the IPO. It would not be surprising to see the stock correct from current levels and I would play the name with caution.

V Notes

Disclosure: Author has a position in Visa.

Comments

[Adesai:]

kid,

You probably made somewhere between 1-2K depending at what price you purchased it and although Visa is a great prospect and great investment, you may not want to put "ALL" your money into it. Im no financial advisor but thats my take, b/c at the end of the day its still a risk. My take is if you lose all your money today would it make a difference in your daily life.....if the answer is "yes" then you may not want to invest, if your answer is "NO" it doesnt affect my daily lifestyle then you should. HOwever, your young and in college and probably dont have children, wife, house payments, etc... so if you were to make a good investment such as this, than you can be ahead of the game when you graduate.

2008 May 01 04:55 PM

[Adesai:]

Good post V winner,

I am an MD and in my field there are law suits every seconds. there is no such thing as a litigation free company ( i bet red cross has a lawsuit).

2008 May 01 05:01 PM

[Matty V:]

Im 24 and have everything in this stock!!!

To the kid. . . put all you got in here, so long as you dont need any of it right away. . . .you wont be sorry

Visa is an Animal and will be at 200 bucks in no time. Sure its gunna cool off, it has to and will do so around 100.
It will be 150 175 200 its only a matter of time!

2008 May 01 06:03 PM

[Matty V:]

oh and almost half of that is on a 20k line of credit too. Stupid ? Risky?
at $63 ya it was risky.

Not Now Though!! :)

2008 May 01 06:09 PM

[User 172125:]

Matty- you got balls man- I like it

2008 May 01 08:43 PM

[User 172125:]

News Flash- Visa Plummets- Seeking Alpha was right !

Visa dropped two dollars to 85.40 today hahahahahahaha

2008 May 01 08:49 PM

[User 172125:]

For those of you waiting for a pullback- HERE IT IS.....

V shares dropped due to two things-

1. Congress is looking to regulate how much a credit card ISSUER can up a person's interest rates in the event of a lower credit score. Although this will effect Credit One, Discover, and Amex - it will not effect V as V doesn't carrry balances.

2. Guidance came out with conservative estimates for the rest of the year- WHICH WAS SIMPLY A REPEAT OF WHAT WAS SAID AT THE EARNINGS CONFERENCE CALL.

This is a great time to buy...........

2008 May 02 11:08 AM

[Ringtone Champ:]

V Winner, Unless VISA stops the branding of credit cards they will continue to make money. Additionally, they have little operational overhead and the majority of the risk is held by the card issuers and merchant service providers. No reason not to continue to climb.

2008 May 02 11:31 AM

[User 172125:]

Ringtone- I hear the bell------

By the way- the shares are about 82.40 in after-hours..... you still have 3 hours to buy the shares under 83- I predict that we may have one more soft day. Right now a lot of money is coming out of ag/oil/gold/money markets/etc..... Long term investors will continue to push this stock along. Don't expect to see the kind of big moves we have witnessed in the past- but you can expect to see V continue a gradual climb. Whenever you see a 2 or 3 dollar pullback it is good to add to your position.

2008 May 02 04:54 PM

[Matty V:]

thanks v winner. .. .

i agree this is close to the best price were gunna see. . .think im gunna snatch up a few more!!!

2008 May 02 05:35 PM

[User 172125:]

Matty- The best is still to come. As long as you are buying long term V is a big winner. I think this will be a 250$ by the end of next year- there are far too many compelling reasons for - and not enough -against it. As our country comes out of its malais and global growth resumes- V will be the primary beneficiary of the global cash to card conversion.

Note to new investors: Do not go into this with unrealistic expectations.....IE- don't expect V to double in the next 6 months. Do expect a continual upward climb (with speed bumps (Friday)- along the way- use the dips as buying opps to gradually add to your position. You can't go wrong...... But continue to be careful coming into the next week. The dow has been on a 3 week tear, and money is cycling continuously - much more so now than in the past. Because we are in a multi-year commodity cylce funds could come back into oil/gold/metals/ag as fast as it came out of. Also there could be some punishing economic news coming out this week. Just be careful- buy on dips- accumulate and don't stick your neck out too far........

The best is yet to come.......

Its like Warren Buffet said: I would rather have a piece of the Hope Diamond than all of a lump of quartz.......

2008 May 03 12:18 PM

[User 172125:]

One more thing- I successfully calle the Brazil play a week ago. This IS NOT a short term play- I like the banking sector - this market will continue to prosper. If you are looking to diversify this market will do very, very well this year. I'm in 20 brazilian stocks right now, have been there - all over SAmerica - have a brazilian wife- and done extensive research.

stocksabroad.com (see the brazilian adr page)

Trust me- this market has 25/30% in it this year........

2008 May 04 03:25 PM

[User 172125:]

NEWS FLASH:

Visa hits an all-time closing high of 87.41$

Investors that failed to participate begin jumping of bridges around the country.........

2008 May 06 04:08 PM

[Matty V:]

V Winner Buddy how ya doing??? lovley day isnt? visa recovers all its previous days loss, and surges higher by that same amount the following day.

Strong stock for the long term guys. im 24, going to be a nice addition to my down payment on a house.

Thanks VISA :)

2008 May 06 09:53 PM

[Matty V:]

OH and the other young guy that bought at 86 and change. . . .feeling better?
No worries
:)

2008 May 06 09:54 PM

[User 172125:]

Matty- Even a better day today than yesterday-

Stockmarket down- 206 points

V - UP -closing at 88.50 .........

I'll take a dollar on a day when 90$ of investors got trampled.

2008 May 07 07:02 PM

[Matty V:]

Today was due. I mean you can have a graph that goes straight up. It will make it back in no time, as investors will jump on the cheeper share price

2008 May 09 05:43 PM

[floyd:]

Visa Champ or Chump?

I bought visa at 78.00 last week. Will i be very happy a years from now, or will i be left holding the bag? Will i be a Champ or a Chump?

2008 May 27 10:31 AM

[Saurischian:]

On May 27 10:31 AM floyd wrote:

> Visa Champ or Chump?
>
> I bought visa at 78.00 last week. Will i be very happy a years from
> now, or will i be left holding the bag? Will i be a Champ or a Chump?
//////////////////////...
78 bones is a nice entry. According to the point an figure chart:
stockcharts.com/def/se...
Visa should have a nice pop once it hits 84 for a double top.

2008 May 27 05:44 PM

[peterswine:]

how much did you buy?


On May 27 05:44 PM Nine wrote:

>
>
>
> On May 27 10:31 AM floyd wrote:
>
> > Visa Champ or Chump?
> >
> > I bought visa at 78.00 last week. Will i be very happy a years
> from
> > now, or will i be left holding the bag? Will i be a Champ or a
> Chump?
> //////////////////////...
> 78 bones is a nice entry. According to the point an figure chart:

>
> stockcharts.com/def/se...
> Visa should have a nice pop once it hits 84 for a double top.

2008 May 27 08:07 PM