by Tom Taulli | October 26, 2012 8:55 am
It’s been a big week for credit card behemoth Visa (NYSE:V). The company has hired a new CEO — Charles Scharf, who was a top executive at JPMorgan (NYSE:JPM) and has a reputation for cutting through bureaucracy. And the company also announced a 50% increase in its quarterly dividend, to 33 cents.
Add in the fact that Visa has been on a torrid run in 2012 — gaining 35% year-to-date, things are looking pretty good.
However, Visa reports earnings next week, and considering the rampant pace the company has kept up this year, a disappointment could put an end to the momentum. Should investors be worried, or should they buy Visa and expect the wind to remain at their backs? To decide, let’s take a look at the pros and cons:
Global Powerhouse: Visa operates the world’s largest payments system for credit and debit cards. The company has a presence in more than 200 countries and processes 10,000 transactions per second. Also, because it’s merely a payment processor, Visa actually takes on no credit risk; instead, the responsibility is on the financial institutions that issue cards, as well as the merchants.
Secular Trends: The shift from cash and checks to digital payments is inevitable, and it’s global. No doubt, this is a huge driver for Visa. More than 30% of global consumer spending — or about $10 trillion — still is in the form of cash and checks. As should be no surprise, the big opportunities are in emerging markets, where Visa has been focusing.
Cash Cow: For the first nine months of 2012, cash flows from operations came to $3.6 billion, up from $3 billion in the same period a year earlier. Visa has $9.4 billion in the bank. The vault is helped by Visa’s brisk growth (revenues increased 10% in the third quarter) and juicy operating margins of around 60%.
Backlash: Visa has become the subject of a multitude of lawsuits. For example, merchants have complained about the company’s substantial transaction (or “interchange”) fees. Interestingly enough, there also might be potential threats from governmental actions; specifically, more regulations.
Competition: Everyone is aware of Visa’s primary payment processing rival, MasterCard (NYSE:MA), but the company also must deal with high-end American Express (NYSE:AXP) and increasingly popular Discover Financial Service (NYSE:DFS). Visa also faces pressure from meag-operators in other countries, such as China’s UnionPay.
Disruption: The emergence of the Internet and mobile devices has brought the threat of technological disruption. For example, eBay (NASDAQ:EBAY) could evolve its already ubiquitous PayPal system, and Google (NASDAQ:GOOG) and perhaps even Apple (NASDAQ:AAPL) are even potential threats to create alternative payment systems thanks to their large cash hordes and ambitions.
Visa certainly is in a strong position, and Scharf — who is taking over a staff of 8,200 after managing a whopping 130,000 employees at JPMorgan — looks like a great pick to lead the company.
But perhaps the most important factor in Visa’s favor is the secular shift toward digital payments, which should keep transaction volume at least steady if the global economy weakens.
True, Visa’s valuation is far from cheap, with V shares trading at a forward price-to-earnings ratio of 19. But in light of the company’s competitive advantages, cash flow generation and long-term growth potential, the price seems more fair than expensive.
So should you buy Visa stock? Yes — all in all, the pros outweigh the cons.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of “How to Create the Next Facebook.” Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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