Warren Buffett famously said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” That maxim applies well to Visa Inc (NYSE:V) at the moment. V stock certainly isn’t cheap, trading at over 30x FY17 earnings per share. And the dividend paid on Visa stock yields just 0.62%, perhaps limiting the stock’s appeal to income investors.
But Visa is a wonderful company with wonderful growth. It’s the dominant credit card issuer in the world, well ahead of rivals Mastercard Inc (NYSE:MA) and American Express Company (NYSE:AXP). Earnings per share are guided to increase 20% in FY17, a huge number for a $243 billion company.
Valuation does look potentially stretched. InvestorPlace columnist Will Healy argued recently that AXP was a better buy than V stock for that reason. But investors should pay up for quality, as Buffett points out. And it’s hard to argue with the quality of Visa’s revenue, earnings, and growth.
Visa Stock Offers a Wonderful Company
Simply as a company, it’s hard to argue with Visa. The company has more than 50% market share in the U.S. in terms of purchase volume. That figure has grown of late, as Visa has taken share from both Mastercard and American Express. Those share gains were helped by Visa’s deal with Costco Wholesale Corporation (NASDAQ:COST) and have continued since.
Meanwhile, the industry looks healthy as well. Credit and debit card usage continues to grow at a rate above the economy as a whole. Margins remain intact and impressive, with Visa guiding for operating margin this year in the mid-60% range, some of the highest in any business anywhere.
And it seems highly unlikely that Visa will be displaced. Companies like Paypal Holdings Inc (NASDAQ:PYPL) and Square Inc (NYSE:SQ) are trying to disrupt the payment industry but both use Visa. Visa and Paypal, in fact, have a partnership for payment services in both the U.S. and Europe.
Visa seems to have an unassailable position in a growing industry. That’s about as good as combination as an investor can get.
And V Stock Offers A Fair Price
The concern, as noted, is valuation. The irony of using the Warren Buffett quote in this article is that Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A,BRK.B) owns not Visa stock but American Express. Indeed, as Healy pointed out, Berkshire has asked the Federal Reserve for permission to increase its ownership in that company.
But it’s not as if V stock is staggeringly expensive. A 27x forward EPS multiple isn’t cheap by any means. But in a market where stable, slow growers generally are trading for low-20s multiples, 27x isn’t that big a number for what should be mid-teen earnings growth going forward.
At the end of the day, investors are going to pay for quality. And while V stock does trade at a premium compared with both MA and AXP, it’s also growing faster than those rivals on both the top and bottom lines. Waiting for a pullback in Visa stock makes sense in theory but that pullback simply may not come.
Visa has a premium valuation because it’s a premium company in an attractive industry. Credit card usage is going to grow, and as of right now it looks like Visa’s share of that usage is going to grow. The acquisition of Visa Europe still has benefits to provide, and further growth internationally will keep Visa stock heading in the right direction. Investors admittedly are paying up for V stock but it’s a stock worth paying up for.
As of this writing, Vince Martin has no positions in any securities mentioned.
