Visa shares are listed on the New York Stock Exchange under the symbol "V". Visa is an American company that is made up of nearly 15,000 financial companies and offers payment solutions. Its origins date back to 1958 and its IPO in 2008. Its main competitor is Mastercard and the company has nearly 20,000 employees. With Visa's fiscal year ending in September, we are fortunate to already have a first "annual" closing in this particular year. However, the impact of the virus on these results will have to be put into perspective since it has only impacted them in the last two quarters.
Valorization
Visa stock is one of those growth stocks that have appreciated considerably over the last ten years. This inevitably translates into its valuation, which is extreme on several levels. The price is in fact:
- 37 times current recurring earnings
- 45 times average recurring earnings
- 11 times book value
- 18 times sales
- 41 times current free cash flow
- 44 times the average free cash flow
Let us recall that a ratio price/sales above 3 is generally considered a sell signal.
Let us also note the following ratios which confirm this extraordinary valuation:
- Current EV/FCF: 43
- Average EV/FCF: 44
- EBIT/EV: 3.44%
- EBITDA/EV: 3.62%
Dividend yield of Visa stock
The dividend is very modest, with only 0.6%. However Visa only pays its shareholders:
- 21.8% of its current recurring profit
- 25.8% of its average recurring profit
- 25.6% of its current free cash flow
- 26% of its average free cash flow
The company therefore has a certain margin to continue to increase its dividend in the future, as it has done in the past at a very sustained rate (16.5% per year on average over the last five years).
Balance sheet & result
Just like the dividend, profits, cash reserves and assets are growing over the long term. The Chinese virus has slightly affected the positive trend over the past year (down 10%), and this was especially noticeable over the last two quarters. However, the company is doing rather well, which can be explained in particular by the explosion of online purchases, linked to the health situation.
Visa's business model is undeniably solid. The financial company manages to create value for its shareholders over the long term and this is reflected in its share price, which has increased tenfold over the last ten years. This is something to think about.
Liquidity reserves are very good, with a current ratio and a quick ratio of 1.9 (up).
Profitability and profitability
The gross margin is huge, with 79% (slightly down). The free cash flow margin and the net margin are not far behind, with 44.4%, respectively 49.7%. Profitability is also very interesting, with an ROA of 13.4% (down), a CFROA of 12.9% and an ROE of 30%.
Debt
Long-term debt represents a fairly large portion of assets, with 26% (and up). However, total debt amounts to only 0.76 times equity. Visa could amortize it in less than three years by using its free cash flow.
Shareholder Return on Visa Stock
It should be noted that over the last five years, the American company has repaid its net debt at an average annual shareholder return of 0.37%. It should also be added that Visa has also reduced its number of shares outstanding during the same period, generating an additional annual shareholder return of 1.94%. The total shareholder return offered by Visa (dividend, debt repayment and share reduction) has thus amounted to an annual average of 2.73% (last five years). This puts the meager dividend into perspective.
Franchise
You don't just improvise as a credit card issuer. Visa is the world's number one with a market share of nearly 50%. Competition is therefore limited, even if it is quite strong with Mastercard. This explains the company's controlled debt and extreme profitability. In addition to the high margins, it should also be noted that overheads are very low, with an average of 15%. Goodwill is increasing and capital expenditure is low, with only 7.5% of profits on average. Visa therefore has all the characteristics of a franchise.
Risks of Visa Action
Visa shares show normal sensitivity to market fluctuations, with a beta of 0.95. Volatility over the last twelve months was significant, with 47%, but is obviously explained by the corona crash, associated with the very strong rise in the stock during the months that followed.
The F-Score (Piotroski) is a rather modest four (out of nine). This tells us that some of the company's fundamentals may be deteriorating (it must be said that they are starting from a very high base). It could also mean that Visa's stock price could underperform in the future. Goldman Sachs reduced its position by 85% during the last quarter, so perhaps this is a sign.
Since we're talking about institutions, let's mention the following other names: Vanguard, BlackRock, T.Rowe, SSgA, Fidelity, Barclays. Obviously, if some of them were to have fun following GS's path, it would shake up the slightest...
Conclusion
Visa stock is expensive. Very expensive. Sure, it's a hugely profitable company, but is it worth the risk? At least, I agree with GS. What about you?
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It is indeed very expensive.
Furthermore, I don’t see a bright future for these payment companies. They have already reached their peak. Also, if central banks deploy their digital currencies on a large scale, we will soon have much less need for Visa and Mastercard (as well as banks) to make payments.
Even at a low deployment rate this will make the fees Visa charges very expensive…
It's true, the stock is overpriced and the dividend is anorexic... And that's why I've been eyeing it for years without ever having managed to convince myself to buy it. Obviously, with a lot of regret when you see the exponential evolution of the price!
Today the situation is the same: all the ratios scream overvaluation, and yet I am willing to bet that Visa will continue to outperform the market for many years to come... Visa has always had the intelligence to buy up its potential competitors rather than wait for them to overshadow it.
Right. This translates into rising goodwill. No wonder Warren Buffett is in on it.
Are you sure Warren is a shareholder in Visa? I had in mind that he only had MasterCard.
Yes, he has even more than Mastercard. Even though he started selling…
https://www.fool.com/amp/investing/2020/08/19/q2-moves-warren-buffett-is-most-likely-to-regret/
Thanks for the analysis, very well done and presented, as always.
For Visa, as "franchise" as it is, I see two risks inherent in its "business model":
1) the one you have already highlighted: with the development of means of payment, it is possible that the use of credit cards will decrease.
2) that linked to the solvency of Visa's debtors (and other credit card issuers): since Visa gives credit (admittedly short-term) to its customers, if these are "borderline" (have no margin or other reserve, which seems to be the case for many customers, who spend everything they earn or more, according to the "American" system that has spread almost everywhere and encourages consumption), there could be massive losses on debtors in the event of a crisis, with job losses and therefore income. The "business model" of credit card issuers is exposed to the grains of sand that slip into the cogs of the economic machine; but it is true that some announced the realization of this risk in 2008, and yet nothing happened...
Thank you Laurent.
You actually put your finger on what is both a risk and an explanation for Visa's success over the last ten years. Consumer credit has been boosted by long-term interest rates.
What will happen when rates rise? This type of business is likely to suffer.
Good morning,
the recent surge in Bitcoin is certainly due to the fact that Paypal will offer payments in btc. Visa and MA are also very interested. A paradigm shift. Enough to make them progress further. In addition, cash will disappear, an additional element. And not to mention the phenomenal growth in online and remote sales with the lockdowns to protect Western people from the flu in 2020.
We can't predict the future. That's why nothing beats following prices using mathematical tools. Bayesian inference tells us that until we have a new element, the same assumptions (here the medium-term increase) remain true. For now, prices remain suspended on the possible re-election of Trump. I think that if he were re-elected, these stocks would plunge a little.
Small note: this is not a Chinese virus, … It was already, according to some doctors, in circulation the previous summer in the US in the form of a new type of pneumonia. If you could correct it…. Poor Chinese 🙂
Thank you very much for the review! As a dividinde, I have never been able to convince myself to buy one! Am I kicking myself? Not at all!
Thanks Philippe. There's no point in looking back indeed. To regret the purchases we didn't make or the sales we did make. Or the other way around. The survivor bias tends to always make us come across nuggets of this style and make us procrastinate. However, there are also plenty of other rotten titles that we have avoided.
Hello Jerome, Hello everyone, this morning, wanting to access the site from Google Chrome, a warning message indicating that the site is a dangerous site appears… am I alone in this case? Jerome, do you know where it comes from? It would be a shame if other users who are fans of your site and the wealth of information no longer access it…
Hello yes thank you I am aware. I was finally able to reach my access provider this morning. Problem with them that should be resolved suddenly.
Everything is back to normal 😉
Phew! 🙂