Visa Is Only Expensive If You Can't Think 5 Years Ahead

Jul. 13, 2014 4:37 AM ETVisa Inc. (V)109 Comments

Summary

  • A cursory analysis may indicate that Visa looks expensive at almost 27x earnings.
  • However, investors may have been thinking the same thing in 2010 when the stock climbed from $65 to $97 per share and traded at 25x earnings.
  • If you accept the consensus that Visa will be making $16 per share five years from now, then the company looks quite intriguing.

At first blush, Visa (NYSE:V) may look a tiny bit on the pricey side. At the current price of exactly $217.00, Visa has produced $8.13 in profits per share for a P/E valuation of 26.7x earnings. Although that may seem expensive, Visa does offer quite a good deal when you think in terms of reasonably expected cash flows that the credit card company should generate, and move beyond an undue focus on its current earnings yield.

I'll give an example to show you what I mean. In 2010, Visa's stock sailed upward from $65 to $97 per share. It could have been easy to look at that 49.2% percentage increase, and immediately conclude that the price of the stock had gotten ahead of itself. At the time, Visa was making $3.91 in profits per share. It could have been easy to look at that 25x earnings valuation, mixed with the 49.2% price increase, and conclude that Visa was too expensive to merit investment consideration.

But here is where things get interesting. Visa has the kind of business model in place that makes it possible to justify the lofty valuation. Here we are in 2014, and Visa has been making $8.13 per share. Imagine what things would look like now, within just four short years of initiating your position. Compared to that $97 purchase price in 2010, the current $8.13 in profits are only 11.93x greater than earnings. The growth in Visa's profits have been so rapid that the pricey-ness of the valuation rapidly gets demolished.

Generally, Benjamin Graham's margin of safety concept applies to finding a high present earnings yield because you don't have to rely on future growth to make the investment successful. And there's a lot of wisdom in that approach. But it is not the end all, be all; your total returns

This article was written by

Income-oriented investor with a focus on cumulative income over a multi-generational period. Special interest in buying "Top 20 companies in the world at a fair price" or great businesses selling at a 30% or greater discount while dealing with a problem that will eventually resolve. You can access my library of 1,200+ financial articles written over the past seven years at "The Conservative Income Investor": www.theconservativeincomeinvestor.com.My best ideas regarding what I'm purchasing are covered over on Patreon:http://patreon.com/theconservativeincomeinvestor

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