Valuentum Exclusive Analysis for the Discerning Investor

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Image Source: Visa

By Brian Nelson, CFA

Visa Inc. (V) is one of our top ideas in the simulated Best Ideas Newsletter portfolio. As a 10%-12% “weighting,” we have been very pleased to see its share price hold up during what is turning into one of the most difficult years for investors in a long time. Year-to-date in 2022, Visa’s shares are down less than 7%, as the ~6% pop during the trading session October 26 (at the time of this writing) has cushioned the blow. Our fair value estimate of Visa stands at $227 as shares yield ~0.93% on a forward annual estimated basis.

We’re huge fans of Visa for three reasons. First, the company operates as a toll road collecting fees every time someone swipes a card, meaning the firm doesn’t take on credit risk like rivals American Express (AXP) and Discover Financial (DFS). Second, Visa’s business model translates into phenomenal levels of profitability and free cash flow margins, helping to generate substantial support for a cash-flow-based fair value estimate. Third, the company has tremendous competitive advantages and benefits from a network effect: as more consumers use its cards, more businesses accept them, and more consumers use them, and so on.

During Visa’s calendar third quarter results, its fiscal fourth quarter performance, released October 25, net revenues advanced 23% on a constant-dollar basis, while non-GAAP income came in at $1.93 per share, beating the consensus estimate by $0.07. Business held up nicely during the period, with cross-border volume increasing 36% in the period. For the twelve months ended September 30, Visa generated $17.9 billion in free cash flow, good enough for a remarkable ~61% free cash flow margin. Business models really don’t get better than Visa’s. The company ended the month of September with roughly a net-neutral balance sheet, inclusive of restricted cash and investment securities.

Here is what CEO Alfred F. Kelly had to say about the quarterly performance and outlook:

In Visa’s fiscal fourth quarter, we saw a continuation of many of the spending trends present throughout 2022: strength in consumer payments, resilience in eCommerce and ongoing recovery in cross-border travel. These trends contributed to robust full-year 2022 results, with net revenues, net income and EPS all up more than 20% year-over-year, despite broader macroeconomic uncertainty and geopolitical turmoil. As we look ahead, while some short-term uncertainty exists, we remain confident in Visa's long-term growth trajectory across consumer payments, new flows and value added services.

We continue to be excited about the Visa story, and it has been a part of the simulated Best Ideas Newsletter portfolio for a very long time. In Visa’s press release, the company’s board raised its quarterly cash dividend 20% to $0.45 per share and authorized a new $12.0 billion share repurchase program (Visa's reports will be updated soon to reflect the dividend hike). Though its dividend yield still trails that of the average S&P 500 company, Visa’s dividend growth potential is phenomenal. We’re also fans of the firm's new buyback authorization as management can carve out additional economic value creation by scooping up shares at a discount to our estimate of their intrinsic value.

Concluding Thoughts

Visa is one of our favorite ideas for long-term capital appreciation potential and is included as a top “weighting” in the simulated Best Ideas Newsletter portfolio. The company boasts tremendous free cash flow margins, and its competitive profile is among the strongest across all of our coverage. Management just boosted its dividend in a big way, while also upping its share buyback authorization. We continue to be huge fans of the name.

Tickerized for V, MA, DFS, AXP, COF, PYPL, SQ, ADS, SYF, FISV, GPN, GBTC, BITO, BTF, COIN, BKKT, BKNG, TRIP, EXPE, AFRM, UPST, SOFI

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About Our Name

But how, you will ask, does one decide what [stocks are] "attractive"? Most analysts feel they must choose between two approaches customarily thought to be in opposition: "value" and "growth,"...We view that as fuzzy thinking...Growth is always a component of value [and] the very term "value investing" is redundant.

                         -- Warren Buffett, Berkshire Hathaway annual report, 1992

At Valuentum, we take Buffett's thoughts one step further. We think the best opportunities arise from an understanding of a variety of investing disciplines in order to identify the most attractive stocks at any given time. Valuentum therefore analyzes each stock across a wide spectrum of philosophies, from deep value through momentum investing. And a combination of the two approaches found on each side of the spectrum (value/momentum) in a name couldn't be more representative of what our analysts do here; hence, we're called Valuentum.