Visa: Growth Through Better Tech

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About: Visa Inc. (V)
by: David Zanoni
Summary

Visa is making using their cards more convenient with tap to pay.

Visa's acquisition of Earthport lays the foundation for improving overseas wire transfers and moving money between bank accounts.

The margins, financials, and cash flow are stellar.

Visa is poised for multiple years of above-average growth.

Visa (V) continually looks for ways to make paying with their cards/accounts more convenient for consumers. The company is also striving to improve the process of moving money between countries and between bank accounts. These efforts will help drive above- average growth for the company for many years.

Visa's high margins, healthy balance sheet, and strong cash flow are the results of the company's efforts and position as a duopoly with their peer, Mastercard (MA). The factors driving the financials are Visa's efforts for growth. Those efforts includes innovating current products, growing in current and new regions, and through acquisitions.

Visa Driving Convenience for Consumers

The recent innovation to enable tap-and-pay contact-less cards for some NY City subways and buses is an example of how Visa finds ways to increase the usage of their cards. The company is making a fast way to pay with the same technology that they implemented in retail stores.

The NY effort makes the paying process convenient and encourages riders to use their Visa cards to pay for rides. Visa can expand these efforts to more routes and other cities. The company can also apply it to many other payment scenarios beyond retail stores. Technology from Square (SQ), for example, allows for contact-less payments that can be used at what used to be cash-only transactions such as: flea markets, bars, produce stands, craft sales, etc.

Paying with the chip technology where you insert your card into the reader takes a little longer than swiping to pay. Visa solved this issue and increased convenience with the contact-less tap-to-pay technology which uses NFC communication for transactions. Contact-less payments are just as secure as the chip insert method because a one-time code protects your payment information. The contact-less payment technology should be attractive to retailers as it can help to increase customer service since it can speed up checkout lines.

Earthport Acquisition Sets the Stage to Improve Global Money Transfers

Earlier this month, Visa announced that they acquired Earthport, a company that enables money transfer services across borders. Visa stated that this acquisition will allow businesses, governments, and individuals to use their Visa accounts to send and receive money from/to their bank accounts.

The current method to do this was through wire transfers. Wire transfers have the disadvantages of having high bank fees and taking too long for payments to clear (reach recipients). Wire transfers can take up to 5 days for international transactions.

Before the acquisition, Visa allowed for payments to be sent between Visa account holders. The Earthport technology will allow money to be transferred conveniently and quickly through bank accounts on a global basis. It will also make the process less costly.

Money transfers between countries has the potential to be a lucrative business because there were 258 million people living outside their country of birth in 2017 according to a migrant study. So, many of these people probably still have families in their countries of birth that they transact with.

Of course this market also includes governments and businesses transferring money. The total market is about $4.8 trillion worth of transactions per day. So, making the process faster and less expensive has the potential to boost revenue for Visa.

Visa's Financials Make the Company Highly Investable

Visa's financials are very attractive from a business and investment standpoint - showing high profitability, stability, and growth. These metrics are likely to help drive the company's above-average growth for the foreseeable future.

Visa achieves high margins and returns: gross margin of 97%, EBITDA margin of 67%, ROIC of 17.6%, and ROE of 37%. The nature of the business of collecting fees for transactions without bearing credit risk drives these metrics.

The company has been growing revenue at double-digit rates and is expected to grow revenue at about 10.5% in 2019 and 11% in 2020 according to consensus estimates. Earnings are expected to grow at over 16% in 2019 and over 15% in 2020. Visa's above-average growth is what helped drive the stock to outperform the S&P 500 in the past. The stock can continue to outperform as long as the valuation remains reasonable.

The balance sheet is solid as Visa has 1.96x more total assets than total liabilities for shareholders' equity of $28.8 billion. There are also 1.6x more current assets than current liabilities. There is $11.5 billion in total cash with $16.6 billion in total debt.

Although the debt sounds like a lot, Visa has sufficient positive cash flow to handle both short-term and long-term obligations. The company generates over $12 billion in operating cash flow per year and is left with over $10 billion in free cash flow for shareholder-friendly dividends and share repurchases.

Visa's Valuation is a Little Above Average, but lower than Mastercard's

Since the credit card companies are such strong producers of cash flow, I chose to use price to free cash flow to value them. Visa is trading with P/FCF of 37.8. This is 27% below Mastercard's P/FCF of 51.6. Visa does trade 10% higher than the S&P 500's P/FCF of 34.3. However, the market tends to award Visa with a higher than average valuation as a result of the company's sustainable above-average growth rate.

Although Visa is trading 10% above the S&P 500, the company's expected revenue growth for 2019 is 123% higher than the S&P 500's expected revenue growth of 4.7% for 2019. Furthermore, Visa's expected earnings growth is 371% higher than the S&P 500's expected earnings growth of 3.4% for this year.

Visa Correlation with Revenue and EPS At this valuation, Visa's stock could continue to correlate along with revenue and earnings growth as it has been over the long-term as shown in the chart. The main possible derailer for Visa's stock is a major correction or a recession. Visa did recover well from the Q4 correction. The stock also recovered nicely from the 2008 financial crisis.

So, I would expect similar strong post-correction and recession recoveries going forward. The reason for that is because Visa doesn't bear credit risk - the issuing banks do instead. Visa is poised to continue to be a beneficiary of economic growth as consumers use Visa cards/accounts to pay for various goods.

Visa's Long-Term Investment Thesis

Visa is doing what it takes to grow with new technology. Making global money transfers faster and less costly is a large growth opportunity for the company. The Earthport acquisition puts Visa in a great position to scale this effort up. Visa could gain significant transaction fees as a result.

The largest risk for the company would be a significant slowdown in consumer spending which would reduce the fees that Visa collects. This happens during recessions. With that said, Visa has solid financials to withstand a recession. The stock would still likely lose a lot of value during a recession, but the stock typically recovers nicely after recession's are over.

The best buying opportunities are after large corrections (like in December 2018) or after recessions. The stock doesn't chop around with volatility too much.

Visa's above-average revenue and earnings growth sets the stage for the stock to outperform the S&P 500 over the next several years. Given the company's strong growth rate, Visa's stock has a good chance to double within 5 years - even if a recession occurs in that time frame. That is based on 15% annual earnings growth, which Visa is expected to achieve.

Disclosure: I am/we are long V. Business relationship disclosure: The article was written by David Zanoni for Kirk Spano's Margin of Safety Investing service.

Additional disclosure: The article is for informational purposes only (not a solicitation to buy or sell stocks). David is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.