As we all know Visa issues credit and debit cards and handles transactions. Since we all know the main business here are some of the finer breakdowns:
First, worldwide market share:
|Change (US)||Change (Rest of the World)||Change (Total)|
|Commercial and other||10%||12%||11%|
|Total Nominal Payments Volume||5%||17%||10%|
|Total Nominal Volume||6%||15%||11%|
Clearly, they are growing the world over, especially overseas. Thankfully not too much of their revenue, or growth, is coming from Europe, as the chart below shows.
|2012 Operating Revenue||2011 Op Rev||Change|
|US||$ 5,720.00||$ 5,135.00||11%|
|Rest of World||$ 4,478.00||$ 3,846.00||16%|
|Visa Europe||$ 223.00||$ 207.00||8%|
|Total||$ 10,421.00||$ 9,188.00||13%|
One potential cause for short term concern is that Asia Pacific countries make up about 3/5 of 'Rest of the World' revenue. With a slowing Chinese economy there is cause for concern. In the past this has been a fast growing segment for the business and rose about 13% this past quarter (vs. a year earlier). Whether that will continue is questionable and depends quite a bit on whether China can follow the government's economic plan for 7.5% growth this year (and not sink considerably lower, which preliminary indications suggest may be happening). This may pose a short term threat, but long term economics dictate that China will continue growing (for more on this check out the BRIC Report from Goldman Sachs). As such I am not worried and will not consider it a reason to stay away from investing in the company.
- 10 Year FCF growth: 52% since their first year reporting data 2008
- Return on Equity is 18% and has averaged about 12.5% ROE over the past 5 years
- $0.00 Total Debt
- 62% Operating margin
Overall Quality/Moat of the Business
Everyone has heard of Visa, and the name carries weight. Further, there is only one company that can pose a serious threat to the company's growth: MasterCard, and Visa has been soundly thumping MasterCard in nearly every metric relevant to the industry. Thus, there do not appear to be any major threats to the company. Further, they have solid return on equity (although not incredible) with spectacular margins, plenty of free cash flow and no debt. So far all signs point to a quality business.
For the full year 2013 Visa says they are expecting "low double digit growth", substantially under the 21% that analysts expect on average. So far it appears that the analysts have been more correct than management. Regardless, nearly everyone is expecting outstanding long term growth for the business, with the average of analysts predictions for annual growth over the next five years coming in at a 19%. While this is a high figure it is in line with the company's past growth and, in my opinion, represents a realilistic expectation. Further, the company is quickly reducing the number of shares outstanding so growth per share will likely be higher than the 19% listed above.
In determining the intrinsic value of a business I like to use two metrics: owner earnings and discounted free cash flow.
For the calculation of owner earnings I ignore changes in working capital as these reductions are used to repurchase shares and buy bonds, thus you are getting an equivalent amount of value from this and these changes do not affect the overall amount of cash the company can produce. Given this owner earnings are about $13.5 a share, which works out to about 1/13.5 of the current price. 13.5x owners earnings is a higher multiple than I would like to pay, but for a company of Visa's quality I consider it worth it. I am happy to pay a bit more for an outstanding company with a realilistic high growth potential. I do not place much weight on this number for a growth company like Visa, however, as the fair value should reflect the expected growth of the company.
Past growth has been exceptional, although number lately were skewed downward due to accounting on a $4B lawsuit. While 19% growth is expected over the next 5 years, and I believe that it could continue for the next 10, if not longer, I like to lower my earnings expectations a bit for DCF analysis. So, for calculations I used a 15% growth rate for the next decade, and 6% thereafter. Based on this, the exclusion of changes in working capital (since it has no impact on the earnings power of the underlying business), and a discount rate of 12% the fair value of the company is about $220/share.
Given the exceptional nature of Visa's position in the credit card/debit card industry, their long term historical growth, and good potential for future growth I would be happy to pay 13.5x owners earnings or 18x current FCF. I believe the fair value of the company is somewhere between $210-$250. At this level I consider Visa a moderately good buy.
Disclosure: I am long V in my personal account and one account I manage for another individual
Disclosure: I am long V.