There are very few investments that I would classify as no-brainers. Those investments are often companies that are effectively a part of an oligopoly, which is one of the reasons I think that Visa Inc (NYSE: V) is a company that should strongly be considered for your portfolio.
One of the amazing things about Visa, and the entire credit card sector in general, is that after decades there are still just a few players in this very profitable sector.
Visa, MasterCard Inc (NYSE: MA) and American Express Company (NYSE: AXP) dominated the credit card processing market for a very long time. Somehow, Discover Financial Services (NYSE: DFS) managed to get a foothold and expand enough to take over significant portion of market share. Other than those four players, however, there isn’t much market share to go around.
Today, as financial services have penetrated every last aspect of our lives, owning V stock is a no-brainer. Just take a look at the stellar earnings report that V stock just put out.
Numbers Behind V Stock
Net operating revenues rose 13% to $5.1 billion. Net income rose a whopping 26% to $2.6 billion. Adjusted earnings per share rose 30% to $1.11 per share. All of this came on payments volume growth of 11%, cross-border volume growth of 11%, and process transaction growth of 12%.
In other words, after all these years, people continue to charge and charge and charge. In fact, the total number of processed transactions in the first quarter of this year was 29.3 billion. Just think about what a staggering number that is. Consumers using Visa cards ran 325 million charges every single day around the world.
The beauty of V stock is that it isn’t only transaction revenues that drive the stock earnings. Visa derives $2.25 billion in revenues from services, $2.13 billion from data processing, $1.75 billion from international transactions, and $230 million from other sources. And $1.29 billion is backed out in the form of incentives and clients.
This is an extremely efficient business — a real cash cow. Cash flow from operations was $5.58 billion. Because a business like this is very little capex, a mere $354 million, there is an enormous free cash flow. Thus cash and cash equivalents at Visa are now $8.14 billion. Long-term debt sits at $16.6 billion. If it weren’t for the fact that debt service is only about 3.7% annually, I would like to see V stock management pay down some of its long-term debt. Instead, it spent about $2 billion in cash to repurchase almost 17 million shares of stock.
I don’t think these repurchases were terribly unreasonable. While I would have preferred management spent money buying back stock at a lower price, the average repurchase price was not at ridiculously overvalued prices as we see with so many other big-name firms.
Bottom Line on V Stock
Analysts peg the annualized five-year earnings growth rate at 18%. I give V stock a 10% premium each for having robust free cash flow, a large amount of cash on hand and a global brand name. Consequently, I would accept a price-to-earnings ratio of 24 as being reasonable for V stock. But because it is a genuine growth stock with EPS growth of more than 15%, I permit a price/earnings-to-growth ratio as high as 2.0.
V stock trades at about 27 times next year’s earnings and thus has a PEG ratio of about 1.1.
I think buying Visa at the present price of $120 per share is reasonable if you have long-term investment horizon.
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. Meyers does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
