VISA (NYSE:V) stock has weathered the coronavirus storm fairly well. Granted it is down over 26% from its peak in mid-February. But this is not as bad as many other stocks. Moreover, it may be time to buy V stock now.
The company issued an update on the SEC database on March 2 about its earnings expected for Q1 2020. Visa said that through Feb. 28, 2020, the most significant impact on its business has been on travel to and from Asia.
The company said that trends through the end of February do not yet fully reflect the impact of the coronavirus spreading outside of Asia. It also said that this deteriorating trend has not bottomed out yet.
Trends For the March Quarter are Discounted in
Obviously, since then, things have gotten much worse in Europe and the U.S. The company has not made any comment about that trend. I suspect that Visa will likely update markets within the next week or two.
However, on March 2, Visa projected earnings based on trends through the end of February, assuming continuing deterioration in March. It expects Q2 net revenue growth will be 2.5 -3.5 percentage points lower than the outlook shared on its Jan. 30, 2020 earnings call.
I looked carefully at the transcript for Q1 2020. There was no clear forecast of net revenue growth. Visa did, however, indicate that through January business driver growth was actually up. Obviously the trend in February and March has been negative so far.
But at least there was a buffer for the last two months from the positive January growth.
Moreover, the expected downturn in net revenue is adequately discounted in the present Visa stock price, which is off 17.3% from the Feb. 19 peak, pretty much matching the gyrations of the S&P 500 index.
Valuation is Significantly Cheaper
Even though the coronavirus outbreak will dampen earnings growth this year, Visa stock is very cheap. For example, assuming earnings growth is effectively zero, earnings per share would be $5.32 per share.
That would put Visa stock, at $157.89 per share, on a price-to-earnings ratio of 29.7 times historical earnings. Moreover, as of its fiscal quarter ending Dec. 31, 2019, its last-12-months (LTM) earnings per share was $5.49 per share.
And don’t forget, this implies that there will be no earnings growth this year.
Therefore, at today’s price, Visa stock trades at a historical price-to-earnings ratio of 27.8 times earnings. This is significantly cheaper than its historical average P/E ratio.
Moreover, the same point about Visa stock’s historical dividend yield is true. For example, in 2017 and 2018 Visa stock had an average dividend yield of 0.58% and 0.59%, respectively.
So at today’s dividend yield, Visa stock would rise 34% if it were to reach its average dividend yield of the past several years.
What Should Investors Do With Visa Stock?
Payment volumes are likely to pick up significantly by the late summer and early fall at the latest. No one really expects that the impact of the coronavirus will actually last that long.
But even if it does, Visa stock is likely to recover much sooner than that. This is because stocks tend to forecast the future much earlier than most people realize, at least several months in advance.
In fact, more people kept indoors through the coronavirus outbreak will not necessarily lead to a significant downturn in payment volumes for Visa. This is because online and digital spending is likely to increase, helping to offset the effect of lower in-store shopping payment volumes.
Therefore, it seems now is a good time to buy Visa stock, while it is down. The stock reflects a lot of bad news already. The turnaround in revenue and earnings later this year is not yet in the price.
In effect, when it comes to brand name companies like Visa, buy the stock when the sentiment is the worst.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers get a two-week free trial.
