Why Visa's Buyback Program Makes Sense

| About: Visa Inc. (V)

Last week, Visa (V) reported strong fiscal third-quarter results that revealed 25% adjusted earnings growth in the period. The firm's GAAP net operating revenue advanced 10% over the prior-year period thanks to solid growth in service revenues, data processing revenues, and international transaction sales. Importantly, during the period the company announced a settlement agreement in the Multi-District Litigation case, which we think will reduce uncertainty for payment processors. Our fair value estimate remains unchanged.

Payments volume growth during the quarter expanded 6% from the prior-year period, and though the pace of expansion is lower than in the first quarter (11%), we were pleased with the rate of increase. Service revenues jumped 15% versus the prior-year period, while data processing revenue jumped 17% from last year's quarter. International transaction revenues and other sales grew 13% and 7%, respectively, from the same period a year ago.

Looking ahead, Visa now expects adjusted earnings per share growth in the low twenties through 2012 (was high teens to low 20s), a level we think is achievable. Annual net revenue growth is expected in the low double digits, and the firm's adjusted annual operating margin should be close to 60% for the full year. Impressively, management expects to generate $4 billion in free cash flow during the year.

All things considered, we were pleased with both the top-line and bottom-line expansion during the period as well as the company's outlook. Further, we think Visa's decision to authorize a new $1 billion share repurchase program makes a lot of sense at current price levels. When firms buy back their own stock at prices below the company's intrinsic value, they are creating value for shareholders. Think of it as the company getting the same bargain on Visa's shares as you. We continue to like the company as a holding in the portfolio of our Best Ideas Newsletter (please see links on left side bar for more info) and may add to position on any minor weakness.

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

Additional disclosure: V is included in our Best Ideas Newsletter.