Babylon Capital® Quality & Valuation Analysis On Visa | Why Visa May Be Poised For A Breakout After 2 Years Of Consolidation

Visa V has been in consolidation for two years, since trading at an all-time high of $252.67 on July 27, 2021. This was warranted considering that V was trading 37x earnings, significantly higher than its typical range of 25x – 30x earnings. Now that the fundamentals have caught up to its stock price, V may be poised for a breakout.

• *NTM Price to Earnings Ratio: 26.67x
• *10-Year Mean: 27.79x
• *NTM Free Cash Flow Yield: 3.80%
• *10-Year Mean: 3.87 %

Today, investors are forecasted to receive ~4% more in earnings per share and a free cash flow yield that is in-line with its 10-year average. Considering its fundamentals, V appears to be fairly valued and has attractive growth potential going forward.

Before analyzing V’s valuation further, let’s have a look at why V is a high-quality business.

Balance Sheet

• Cash & Short-Term Investments: $16.59B
• Long-Term Debt: $20.60B

V has a strong balance sheet, evident from its AA- S&P Credit Rating.

Return On Capital

• 2017: 21.6%
• 2018: 24.6%
• 2019: 27.5%
• 2020: 21.4%
• 2021: 24.3%
• 2022: 30.8%
• LTM: 32.1%

Return On Equity

• 2017: 20.4%
• 2018: 30.9%
• 2019: 35.2%
• 2020: 30.7%
• 2021: 33.4%
• 2022: 40.9%
• LTM: 42.4%

V’s return metrics are stellar, highlighting the financial efficiency of the business.

Revenues

• 2015: $15.91B

• 2016: $17.66B

• 2017: $18.35B
• 2018: $20.60B
• 2019: $22.97B
• 2020: $21.84B
• 2021: $24.10B
• 2022: $29.31B
• CAGR: 9.12%

Free Cash Flow

• 2015: $6.17B
• 2016: $5.05B
• 2017: $8.61B
• 2018: $12.22B
• 2019: $12.02B
• 2020: $9.70B
• 2021: $14.52B
• 2022: $17.87B
• CAGR: 16.40%

Net Income (Earnings)

• 2015: $6.32B
• 2016: $5.99B
• 2017: $6.69B
• 2018: $10.30B
• 2019: $12.08B
• 2020: $10.86B
• 2021: $12.31B
• 2022: $14.95B
• CAGR: 13.08%

Over the past 7 years V has been able to grow its revenues, free cash flow, and net income at appreciable rates.

Share Buybacks

• 2013 Shares Outstanding: 2.62B
• LTM Shares Outstanding: 2.11B

By decreasing the number of its shares by about 20% in the last 10 years, V managed to boost its earnings per share by 25% (assuming no growth). This means that each share now represents a larger portion of the company's earnings, resulting in increased profitability for investors.

As you can see, V is a high-quality business with a wide moat.

Now let’s shift our focus to its valuation.

Benjamin Graham, widely regarded as the father of value investing, advocated for a principle known as the "2G" rule. According to Graham, investors should not pay more than twice the growth rate (2G) of a business.

For instance, if a company is projected to achieve a 10% compounded annual growth rate (CAGR) in earnings over the next five years, a price-to-earnings (P/E) ratio of 20x might be considered reasonable. However, if the expected earnings growth rate is 5% compounded annually over the same period, a P/E ratio of 20x would be considered unreasonable, as the investor would be paying four times the growth rate.

With a multiple of 26.67x, V would need to achieve approximately a 13.34% CAGR in earnings over the next five years to justify its current valuation. Interestingly, this growth target is slightly below the forward estimates, suggesting that V has the potential to meet or slightly surpass the market’s expectations.

V is scheduled to announce its quarterly results after the market close on July 25, 2023. The anticipation of an earnings beat or a positive earnings report has the potential to serve as a fundamental catalyst, that could propel V's shares to reach new all-time highs.

*The valuation data utilized in this article is subject to potential changes and may not reflect current market conditions or future developments beyond the time of submission for publication.

Disclosure: I am long V. Babylon Capital®, its representatives, and client(s) have positions in the securities discussed in this article. The information contained in this article is intended for informational purposes only and should not be construed as investment advice to meet the specific needs of any individual or situation. Past performance is no guarantee of future results. Information contained in this article has been obtained from sources believed to be reliable but is not guaranteed as to completeness or accuracy.