Visa’s (NYSE:V) stock was up 15% Wednesday after the Federal Reserve approved higher-than-expected debit card fees. Should you buy the stock now, or does its current price reflect all its upside earnings potential?

The Fed was expected to limit so-called debit-card swipe fees, also known as interchange fees — paid by merchants who pass the money to card issuers — to 12 cents a transaction. The pleasant news for investors of debit-card companies was that the Fed actually approved a 21-cent-per-transaction limit, effective Oct. 1.

The bad news is that the new interchange fees will be less than the old average of 1.14% of the purchase price. But since the fee
beat expectations, Visa’s stock rose.

There are two good reasons to buy Visa stock:

• Long-term financial strength. Visa’s revenue has risen at a 24.8% average annual rate in the last five years, while its profit soared at a 62.1% annual rate, yielding a high 37.7% net profit margin. Visa has a tiny speck of long-term debt — 0.1% of equity and its cash balance has increased at a 44.4% annual rate to $4.05 billion in 2010.
• Strong second-quarter earnings. In the quarter ended in March, Visa’s operating earnings and revenue beat Wall Street’s expectations.

There are also two pieces of mixed news:

• Visa stock is not cheap. Visa trades at a price-to-earnings-to-growth (PEG) ratio of 1.24 (where 1.0 is considered fairly valued). Visa’s P/E is 19.3 on earnings expected to climb 15.6% to $5.68 a share in 2012.
• Progress in trying to earn more than its capital cost. Visa does not earn enough in operating profit to offset its cost of capital. But it is getting much closer. After all, it’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In 2010, Visa’s EVA momentum was up 9%, based on 2009 revenue of $6.9
  billion, and EVA that improved from negative $704 million in 2009 to negative $69 million in 2010. If its EVA Momentum continues at
  this rate, it looks like Visa will generate positive EVA in 2011.

My conclusion is that Visa is a very strong company whose stock I would consider buying on a market dip. With the volatility expected during
July negotiations on the debt limit, it would not surprise me to see some big down days on the market. And those days might be good ones to consider picking up Visa at a lower price.

Peter Cohan has no financial interest in the securities mentioned.