There are few stocks better than those that are part of an oligopoly. That is very much true of Visa, Inc. (NYSE:V). As one of but a handful of credit card payment processors, Visa owns a large chunk of one of the largest transactional business models in the world.
The beauty of Visa is that its core business does not endure any material risk as far as the transactions themselves. V stock is not about revenue from interest or fees from account holders. Nor does V stock rely on interchange reimbursement fees. All Visa does in this arena is to “administer the collection and remittance of interchange reimbursement fees.” V stock revenues comes from its processing and operational systems.
However, it is important to note that V stock isn’t just about that processing ability. Visa has vastly expanded its businesses. It handles processing for general purpose credit cards, debit cards, and prepaid cards for payroll, government benefits, and healthcare HSA accounts.
Visa’s systems are so robust that they can handle 65,000 transactions per second, and processed over 83 billion payments in 2016.
Visa Stock Upsides
V stock has also benefitted from the introduction and growth in Visa Checkout. This is used for digital commerce among 15 million consumers. Visa Direct has emerged as a popular push-payment system often used in P2P transfers. Visa has also become a leader in risk management and payment security.
Visa stock has done a terrific job of diversifying and balancing where its revenues come from. In 2016, $6.7 billion of revenue came in for services provided in support of client usage of Visa products. $6.3 billion was generated for authorization, clearing, settlement, network access, and other support that facilitate transactions. Another $4.6 billion was earned for cross-border transaction processing and currency conversion.
When you add it all up, Visa has the largest market share by far based on all categories. It handles 59% of all payment volume and 63% of total transactional volume by amount. It’s total of 148.5 billion total transactions account for 65% of the market, and it has over 3 billion cards issued, compared to 1.84 billion cards combined for all its competitors.
I’ve often said that energy and defense are two must-own sectors in the stock market. Financial services is another. That sector has become intrinsic to how global businesses operate. You can go into the farthest reaches of developed nations and they will have handheld credit card processors. There billions upon billions of financial transactions that occur daily involving electronic payments. You have to own some part of this sector, especially as the world moves increasingly away from cash.
Now, choosing among the Big Three, which includes Mastercard Inc. (NYSE:MA) and American Express Company (NYSE:AXP) isn’t a terribly easy choice. I normally would choose based entirely on valuation. Mastercard is a fine company and I don’t think there’s big downside to owning it. It really is a toss-up as far as I’m concerned, but I defer to V stock because it is the 800-pound gorilla given how much it dominates the market.
American Express is also a fine company, but I feel as though its brand is not what it used to be. It used to have this loftier, elite feel to it but it seems to have been brought down to earth.
Mastercard’s $153 billion valuation, net of net cash, puts it at 35x TTM net income. With a 5-year growth rate of 16.77%, I then add its 0.62% yield and give it 10% premiums each for having a world-class brand name and great cash flow. So fair value would be around 22x. When a company is growing earnings at more than 15%, I may permit a PEG ratio of up to 2.0. So even if I went that high, Mastercard still trades at a premium.
The Bottom Line on V Stock
Visa stock has a $248 billion valuation, which puts it at 38x TTM net income. With a 5-year growth rate of 16.63%, I then add the Visa stock dividend of 0.63%, and give it 10% premiums each for having a world-class brand name and great cash flow. So fair value would be around 21x. When a company is growing earnings at more than 15%, I may permit a PEG ratio of up to 2.0. So even if I went that high, Visa also still trades at a premium.
So I need to see about 20% decline from here to buy Visa stock.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
