Dear Readers,
Here is an article i published on Seeking Alpha. You can click on the link to view the article on Seeking Alpha’s website.
Summary
- Visa stock has risen +/- 25% on average per year during the last 5 years.
- The company has had net margins over 40% during the last 5 years.
- Improving net margins in 2018 will help boost the stock.
- Visa’s expensive valuation is offset by its profitability and by its solid financial health.
I have been a shareholder of Visa (NYSE:V) for 5 years now. This stock has been one of my top performers during this time span. It went from $49 in 2014 to its current price of just over $149. Revenues grew close to 12% per year between 2013 and 2017, while net profits grew just under 8% during the same period. Its current valuation, at close to 36.5 time its earnings, seems expensive. However, as we will see in the sections below, the improving net margins as well as the growth of the e-commerce and non-cash transaction volume worldwide make Visa a solid company to hold for years to come.
Financial Results
Income Statements (Millions USD)
| Description | 2013 | 2014 | 2015 | 2016 | 2017 | 5 yrs Avg. |
| Revenues | 11,780 | 12,700 | 13,880 | 15,080 | 18,360 | 11.7% |
| Cost of Revenues | 500 | 507 | 474 | 538 | 620 | 5.5% |
| Gross Profit | 811,280 | 12,195 | 13,406 | 14,544 | 17,738 | 12% |
| Operating Expenses | 4,039 | 3,610 | 3,834 | 4,018 | 4,827 | 4.6% |
| Net Profits | 4,960 | 5,438 | 6,328 | 5,991 | 6,670 | 7.6% |
| Gross Margin | 96% | 96% | 97% | 96% | 97% | 96.3% |
| Net Margin | 42.3% | 42.8% | 45.6% | 39.7% | 36.3% | 41.3% |
Source: Yahoo Finance and Visa 2013 annual report
Balance Sheet (Millions USD)
| Description | 2013 | 2014 | 2015 | 2016 | 2017 | 5 yrs Avg. |
| Current Assets | 7,822 | 9,562 | 10,021 | 14,313 | 19,023 | 24.9% |
| Total Assets | 35,956 | 38,569 | 39,367 | 64,035 | 67,977 | 17.3% |
| Current Liabilities | 4,335 | 6,006 | 5,355 | 8,046 | 9,994 | 23.2% |
| Total Liabilities | 9,086 | 11,156 | 9,525 | 31,123 | 35,217 | 40.3% |
| Shareholders’ Equity | 26,870 | 27,413 | 29,842 | 27,195 | 27,234 | 0.3% |
| Current Ratio | 1.8 | 1.6 | 1.9 | 1.8 | 1.9 | 1.8 |
| ROA | 14% | 14% | 16% | 9% | 10% | 12.6% |
| ROE | 19% | 20% | 21% | 22% | 24% | 21.2% |
Source: Yahoo Finance and Visa 2013 annual report
The numbers above provide a good overview of how the company has fared during the last 5 years. Revenues have grown at a decent 11.7% per year; however, the net margins have been shrinking in the last 2 years. This is why the net profits only grew by an average of 7.6% per year between 2013 and 2017.
It is intriguing to look at Visa’s revenues from the United States and from the international markets during the last 3 years:
| Region | 2015 | 2016 | 2017 | Growth Rate |
| United States | 7,406 | 7,851 | 8,704 | 3.4% |
| International | 6,219 | 7,040 | 9,654 | 24.5% |
Values are in Millions USD
Source: Visa 2017 annual report
As we will talk about in the “Discussion and Outlook” section, this table above provide a glimpse of where the company’s future growth lies. The United States still generate a very large chunk of Visa’s revenues; however, the international markets, most notably Europe and Asia, will provide solid growth potential for the company during the next decade.
Visa’s balance sheet provides a strong indicator of its solid financial health. The growth of the company’s assets has been 17.3% per year, and its current ratio has stayed above 1.6 every year from 2013 to 2017. Liabilities grew at an average of 40% per year between 2013 and 2017. Most of the debt was used in 2015-2016 to purchase Visa Europe.
Valuation
DCF Model
The output of my DCF model provides a price of $136.44/share. At its current price of $149.44/share, the stock seems to be slightly overpriced. In my model, I have used a revenue growth rate of 11% per year and net margins of 40%. My 1-year price target for Visa stock is $160. This is 7% above its current market price.
P/E and PEG Ratios
Let’s now look at the company’s P/E and PEG ratios against some of its peers:
| Growth (5 yrs) | P/E | PEG | |
| V | 19.1% | 36.5 | 1.9 |
| Peers | Growth (5 yrs) | P/E | PEG |
| MA | 22.5% | 49.5 | 2.2 |
| AXP | 11.8% | 28.9 | 2.5 |
| COF | 11.85% | 15.4 | 1.3 |
| Average | 15.4% | 31.3 | 2 |
Given the numbers in the table above, I conclude that Visa is selling at a fair price-to-earnings if we consider its expected growth potential.
Discussion and Outlook
Now that we have looked at the company’s past financial results and its valuation, I will develop my thesis on why Visa is a good investment for any investor’s portfolio and why I believe it is a solid stock to own for the long term. As I said in the introduction, I invested in Visa about 5 years ago, when the stock was selling around $50 a share (considering the 4-1 stock split in 2015). My investment in Visa gave me close to 25% average growth per year.
V is now selling at 36.5 times its earnings. I normally like stocks selling close to a P/E of 20. Visa stock may be pricey at the moment, however given the quality of the business, its price-to-earnings ratio of 36.5 seems fair.
Profitability
When we look at Visa’s past financial performance (2013-2015), we see that the company produced the following growth rates:
- Revenues growth of 11.7% per year
- Net profits growth of 7.6% per year
These growth rates may not command a P/E ratio of 36.5. However, we must look at the evolution of the net margins. Net margins shrank from 42.3% in 2013 to 36.3% in 2017.
The decline in net margins coincides with the company’s acquisition of Visa Europe in 2015. Mergers/acquisition will often have a short-term negative impact on the net margins of the acquirer. The question is: when will the acquirer manage to return to its typical profitability level? I believe that Visa is on track to get back to net margins in the range of 42-45% in 2018, if we consider the numbers provided for the first two quarters of 2018.
Growth
Revenues will be driven by various sources:
E-commerce
The market value of e-commerce could potentially double from the levels of 2017 ($2,304 billion) to $4,878 billion (estimate) in 2021.
Given these statistics, Visa and its competitors should have an expanding playground to work with during the next decade. This could help boost its top line by 2% per year in the next 5-10 years.
USA Market
The number of Visa credit cards in circulation in the United States is growing slowly. Visa’s revenues from the United States has grown at a pace of 3.4% per year during the past 3 years. If we exclude the expected growth from the e-commerce market, the American market can still provide 3-4% growth of the revenues during the next 5 years.
International Markets
As we have seen previously, Visa’s revenues from international markets increased by more than 24% during the past 3 years. The Asian market and Europe will provide growth opportunities in years to come.
Europe
Visa bought Visa Europe in 2015. The company generates around 20% of its revenues from Europe and 45% from the United States. The American market is reaching maturity, but the European market still has untapped potential for Visa and its competitors. The GDP value of the European union and that of the United States are in the same range, so I will not be surprised if Visa’s revenues from Europe increases by 10-12% per year during the next decade.
Asia
Emerging Asia could see the total value of non-cash transactions reach 20-25% growth per year in the next 5 years. This is obviously the region of the world in which Visa’s business should grow the most in the next 15-20 years.
There is however a shadow on the Asian market: The credit card market in China is heavily regulated. For this reason, we should not expect the company’s revenues to grow much in China for years to come.
However, countries like India, Malaysia, Indonesia and the Asia Pacific in general could be worth billions in revenues for companies such as Visa in years to come. One-third of Visa cards in circulation are in this area. I would expect the Asian market to make up for 2-3% of the company’s growth in the next 5 years, hopefully more.
Improving Net Margins
As I have pointed out earlier, the net margins of Visa dropped to around 35% in 2017. As it is digesting Visa Europe’s acquisition, and according to the quarterly reports issued in 2018, it seems like the company is on its way back to net margins around 42-45%, which will help boost the bottom line to new heights.
Share buybacks
The company also announced a share buyback program worth close to $7.5 billion. Long-term investors such as me will appreciate this effort to boost the earnings per share. Visa has a solid balance sheet, and its profitable business model can certainly sustain this program.
Risks
Visa is a solid company. However, investors should consider the following risks before investing:
- Economic slowdown in the USA or around the globe;
- Currency exchange: Revenues are published in USD, however a severe drop of international currencies, most notably the euro, could have a negative impact on its profitability;
- New regulations in the USA or around the globe could affect the company’s operations;
- Cryptocurrencies.
The last item (cryptocurrencies) must be mentioned, even if I don’t think it will be a concern in years to come. The blockchain technology has some benefits, however I do not see cryptocurrencies as replacing international currencies in the next decades.
Conclusion
Visa can deliver 10-15% growth for the next 15 years, thanks to:
- Its brand known worldwide;
- The extensive network of payment processing services around the globe;
- The growth of e-commerce and non-cash payments processing, notably in Europe and Asia;
- Net margins of 42-45%;
At its current valuation, I would not tag a Buy rating on V. However, as a shareholder, I am holding onto my shares with a long-term perspective.
Disclosure: I am/we are long V.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.