As always, below represents my opinions and should not be construed as financial advise. Always do you own due dilligence. I welcome your feedback of my opinions.
· Company Description
o ELI5 the company’s business model
§ Visa at its core is a payment processor. Visa connects the buyer and seller while a financial partner provides the cash in to facilitate the transaction. These partners are paid the value of rewards (client incentives) to hold in escrow to pay to end users of their cards.
· Company Soundness
o How does the company collect revenue? Does the company have a good or services that is purchased frequently or a regular interval?
§ They earn revenue by facilitating payments between customers and merchants, data processing revenues to facilitate clearing and settlement, International transactions allow them to earn fees to enable cross-currency transaction and finally other revenues which is mainly licensing fees. Together, the above makes up gross revenue.
§ Their cards are used daily and are broken down between debit and credit transactions. Credit Cards are typically co-branded and affiliated with a bank (that provides the funds) and a company (which sets the terms of the awards). Debit cards are connected directly with a financial institution and allow you to pay directly from your account without providing your bank account number.
o Do they operate with significant leverage?
§ No, they have $0.65 cents of debt for every $1.00 of equity and operate with an extremely high interest coverage ratio of 36x.
o Is their balance sheet will suited for a downturn and why?
§ Yes, while revenues will rise and fall with the economy, there cards will be used continuously. They have access to $950 million of commercial paper with no balance outstanding.
§ Visa also operates with a negative cash conversion cycle. This is in part enabled by collecting fees when they occur but pay rewards over time. This is tracked by capitalizing their rewards and making periodic payments.
· Can it be Replicated?
o Is there evidence that the company has defended its market position in the past?
§ For sure. There are only 4 players in the credit card market: Visa, MasterCard, AMEX and Discovery. Visa has been in the payment space for over 60 years. Despite technological changes, they continue to remain at the center of the payment industry for reasons will describe below.
o Is there evidence that market power is growing and that this will lead to strong financials?
§ Yes. FCF margins have averaged a staggering 55.5% over the past 5 years, returns on assets over 15% over the past 5 years, steady revenue growth. Their financials are the envy of most of the world.
o What is the competitive advantage?
§ The advantage is to replace Visa, you need to find a method to have customers want to use your new payment system and need to have merchants who accept the payment method. Additionally, Visa wisely pays incentives for using their cards. This adds a further barrier as you would omit a benefit by not using their card. Given their unprecedented scale they can leverage their extremely low operating costs over a massive revenue base enabling these massive margins. A smaller player would not have this level of scale and would need to burn a significant amount of capital to scale. Take new players of late. Venmo was able to get users and replaced sending your friends cash or checks but has had a difficult time being accepted by merchants for fees. Apple and Android pay brought their massive consumer lists to the digital world, but still rely on the cards as they don’t have the merchants nor do the programs offer rewards (outside of credit cards).
§ Additionally, Visa has no fear that it won’t be accepted. You know it is accepted virtually anywhere. Most consumers would not want the headache of a new payment system given the current system works so well.
o Would $10 billion of capital be enough to re-create the company?
§ I don’t believe so. Their advantage is not so much based on allocating capital for a long time. It’s a brand of trusted secure payments with a well-entrenched network effect.
§ I think it will be extremely difficult for a new player to get merchants, customers and fund an incentive for using their new payment system.
o Are parts of the company not able to be recreated with capital? Which parts and why?
§ The network effect for payments.
o Are there competitive threats on the horizon?
§ Yes, this history of payments overall is a story not for the faint of heart for most players. New technologies are always trying to enter the mix. Whether its crypto, Venmo or Cash App or whatever other new methods come down the pike there will always be threats to this market.
· Growth
o Is there a 90% chance that earnings will be up 5 years from now?
§ Yes
o Is there a 50% chance earnings will continue to grow in excess of 7% per year after the 5 year period?
§ Yes, Visa has grown revenues at 10% per year with stable fat margins. Cash still represents 20% of all transactions across the globe. This number will likely continue to dwindle over time giving Visa a nice tailwind to grow in excess of worldwide GDP growth +/- currency changes.
· Watch List Decision
o Do you honestly know enough about the industry and company to make an investment decision?
§ I believe so.
o Bottom Line: Based on your answers is the company well insulated from economic and competitive shocks while able to grow for many years to come?
§ I feel it would be extremely difficult to kill.
· Valuation
o Value the company
§ Revenue FYE 09/30/22 was $29.310 billion for 2022
§ Revenue is forecast to be $39.451 billion for FYE 25
§ Revenue is forecast to $54.61 billion for FY 28
§ That is a 3-year revenue CAGR of 10.41% from 22 to 25
§ That is a 3-year revenue CAGR of 11.49% from 25 to 28
§ Shares have decreased by 1.5% and 1.9% per year over the past 3 and 5 years respectively. Most of these buybacks accrued with FCF yields of 3%. Since current FCF yield is slightly above this average, I feel it is fair to project that shares decrease a slightly more optimistic range of 1.5% to 2.25% per year.
§ With current shares outstanding of 1.883 billion, this suggests shares outstanding are estimated be 1.75 to 1.80 billion shares on 09/30/25.
§ Current dividend policy is $0.45 per quarter or $1.80 per share. Let’s hold that going forward. Having said that it will likely rise over the next 2 years.
§ Levered FCF margins are fairly stable. Lets assume 50% to 60% and I will use a 10% discount and premium to the estimated revenue with the low and high margins
§ Putting it all together you get a FCF per share of $9.86 to $14.88 on 09/30/25.
§ FCF Yields have averaged 3.2% over the past 5 years. Given the companies entrenchment and some cyclicality and that 3 years after 2025 its current expectations are to maintain a 10+% growth rate, a 3.5% to 4.5% FCF yield is fair in my view.
§ To value the company, I assumed the high FCF per share will be associated with higher yields and lower FCF per share will be paired with lower yield. This gives a range of value per share on 09/30/2025 of $281.79 to $330.64.
§ Currently shares are selling for $207 which implies a 15.6% annual return at the midpoint.
o Would it be a prudent investment to buy the company at current levels?
§ I believe so, a company with the risk characterized in Visa in my view should be selling at a price that would yield the same as the market, call it 10%. That implies a price of $239 per share given my expectations.
§ Given my expectations, Visa seems to be modestly undervalued
Sources:
Aggregated Data: https://finbox.com/NYSE:V
10-K 09/30/22: https://d18rn0p25nwr6d.cloudfront.net/CIK-0001403161/f4eefdcf-6779-4b32-a56f-6201f3ee3523.pdf
Currently Long V
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