Visa: Bringing Home A Medal

| About: Visa Inc. (V)

Michael Phelps and Usain Bolt weren't the only medal winners in the recent Olympics, as payment technology company Visa (NYSE:V) and oil and gas company British Petroleum (NYSE:BP) have been noted as winners with regard to the Olympic branding event. Visa with its nostalgic Nastia Liukin, Derek Redmond and Nadia Comaneci commercials narrated by Morgan Freeman and British Petroleum with its patriotic USA commercials definitely scored medals.

Visa is also performing well outside of the Olympics as in its Q3 2012 earnings call held on July 25, 2012 the company reported quarterly revenue of $2.6 billion, which represents a year-over-year increase of 10%. The company noted quarterly payments volume increased 6% year-over-year.

Geographically, Visa's U.S. segment experienced a payment volume increase of 10%, Canada increased 8%, the aggregate of Central and Eastern Europe, Middle East and Africa increased 41% and Latin America increased 20%.

Visa sees a lot of business opportunity remaining, as 30% of global consumer spending of almost $10 trillion continues to be performed via cash and check. Russia is a target on the company's radar, as over 80% of transactions in Russia are cash-based. Additionally, the company is making steady progress in Indonesia with a population fast approaching 250 million people.

Visa is confident the courts will approve a settlement with retailers, with several retailers, including Wal-Mart Stores (NYSE:WMT) and Target (NYSE:TGT), and the National Grocers Association opposed to the settlement.

On a negative note, the company indicated it expects to experience a permanent deterioration in debit card volumes as a result of the Durbin legislation.

The company noted it is not seeing any significant signs or trends related to an economic slowdown and expects a modest increase in performance for 2013 over 2012.

Visa noted its computer, tablet, mobile phone payment product has 6 relatively large merchants using its system.

Visa's stock price has been ballistic over the last year as shown below:

Visa's Price-to-Earnings (P/E) ratio of 77 and its Price-to-Sales (P/S) ratio of 11 are expensive when compared to the market in general. And, Visa's P/E and P/S ratios are also expensive when compared to its competitor American Express' (NYSE:AXP) P/E and P/S ratios of 13 and 22, respectively, MasterCard's (NYSE:MA) ratios of 26 and 7.5 and Discover's (NYSE:DFS) ratios of 8.5 and 3, respectively.

But Visa's P/S ratio is not out of normal when compare to its historic value as shown below:

(Click to enlarge)

Visa's P/E ratio is quite out of the normal when compare to the historic, but a lot of this is a result of the impending settlement with retailers.

With Visa's earnings release in the dust, its Olympic branding prowess, and its somewhat bullish outlook, a bull-put credit spread is considered for the company. A bull-put credit spread may be entered for a net credit by selling one put option and purchasing a second put option further out-of-the-money. The goal is for the options to expire worthless while retaining the initial net credit as profit.

Using PowerOptions, a variety of Visa bull-put credit spreads for September expiration are available as shown below:

(Click to enlarge)

The V 2012 Sep 115/120 bull-put credit is attractive with a potential return of 8.7% (96.2% annualized) and with a separation between the underlying and the strike price of the short put option of 6.3%. The Visa bull-put credit spread can be entered for a net credit of $0.40 by selling the V 2012 Sep 120 put option for $0.64 and purchasing the V 2012 Sep 115 put option for $0.24.

V Bull-Put Credit Spread Trade

  • Sell V 2012 Sep 120 Put at $0.64
  • Buy V 2012 Sep 115 Put at $0.24

A profit/loss graph for one contact of the Visa bull-put credit spread is shown below:

(Click to enlarge)

For a stock price above the $120 strike price of the short put option at expiration in September of 2012, the position will be fully profitable. For a stock price below the $115 strike price of the long put option at expiration in September of 2012, the position will result in a total loss, however, the position should be managed for an exit or a roll prior to experiencing a loss.

A management point of $125 is set for the position. If the price of the stock drops below $125, then the position should be managed for an exit or a roll.

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

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