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Visa (NYSE:V) is trading at price-to-earnings multiples between two and three times those of its peers. Moreover, even if rosy analyst estimates are correct and Visa's earnings growth pulls ahead of its peers, such growth would have to be sustained for too many years to validate its high price-to-earnings multiple. The high price multiples of Visa should dissuade investors from buying until its valuation metrics descend closer to those of its industry.

Computing Future Valuations from Growth Projections

Investors should buy stocks trading at prices which make them good deals. A poor company trading at a dismal price may be an excellent trade. Visa shares are trading at the other extreme: it is a good company trading at fantastically enthusiastic valuations which should be avoided. Its metrics are provided with other business services companies:

 

 

Ticker

Company

P/E

Earnings Growth Est.

P/S

Sales Growth Est.

V

Visa

76.9

19.5%

11.2

23.8%

MA

Mastercard

27.3

18.5%

7.8

15.1%

FIS

Fidelity National Information Services

20.3

12.7%

1.8

19.4%

FISV

Fiserv

17.8

12.1%

2.3

4.1%

TSS

Total System Services

17.5

8.7%

2.3

0.2%

WU

Western Union

6.2

10.8%

1.3

4.2%

Source: Finviz.com

Do the higher growth estimates of Visa justify its higher valuation multiples? Future valuation multiples of Visa and its peer stocks were modeled by combining expected growth and trailing valuation multiples. Graphs of future price-to-earnings and price-to-sales ratios based on analyst earnings growth estimates and historical sales growth follows:

(click to enlarge)Forward PE

(click to enlarge)Forward PS

These projections illustrate the absurdity of current valuations for Visa. Analyst estimates for faster-than-economic growth are not predictive after three years or so, yet somehow investors are paying prices for Visa shares which imply they can see earnings for more than a decade out. Other traditional competitors or new entrants like Square could throw a curve ball.

Estimated convergence years were calculated below for Visa and its industry peers:

Visa Competitor

P/E Equivalence

P/S Equivalence

Mastercard

2139

2015

Fidelity National Information Services

2033

2062

Fiserv

2033

2020

Total System Services

2026

2018

Western Union

2044

2023

The projected crossover dates span well into the distant future for the price-to-earnings and price-to-sales multiples, demonstrating how Visa shares are overpriced. Investors should avoid Visa at current prices.

Instead, they should consider other companies on this list as more reasonable alternatives which can be justified without extending forecasts beyond a 3-year horizon. In particular, Western Union and Fidelity National Information Services trade at lower valuations well beyond reasonable time-frames. At current prices, they are better payment & transaction processing stocks.

Please read the article disclaimer.

Source: Is Visa Overpriced?