Image Source: Visa
The credit card network hit all-time highs today. We continue to be huge fans of the company’s fundamentals.
By Brian Nelson, CFA
Another day, another new high for top-weighted idea in the Best Ideas Newsletter portfolio, Visa (V). Briefing Investor said it succinctly:
Visa…is trading at a new all-time high after the company reported better than expected fourth quarter results and gave encouraging guidance for fiscal 2018…
Visa owns a global payment network. Unlike American Express (AXP) and Discover (DFS), which own payment networks and issue credit, Visa doesn’t take any credit risk — Capital One (COF) is a bank that issues a lot of credit cards. Visa is a technology company in the financial sector, just like MasterCard (MA).
Visa has missed earnings estimates just two times since its IPO nine years ago. The stock is up over 600% since the IPO. The company has also beat on the top line five quarters in a row.
Visa has been and will continue to ride the secular shift to digital payments.
We can’t get enough of the good news. During Visa’s fiscal fourth-quarter, results released October 25, the company showcased net operating revenue growth of 14%, a 13% increase in total Visa processed transactions, and a 15% advance in GAAP net income per share during the period, the latter excluding two special items from the same quarter last year. Visa ended fiscal year 2017 with $15.3 billion in cash and cash equivalents, as it continues to haul in copious amounts of free cash flow. Management is optimistic about future growth, too, particularly in Europe. CEO Alfred Kelly had the following to say in the quarterly press release about ongoing potential from the company’s recent addition of Visa Europe:
We’re very pleased with our progress in Europe and will continue to make strategic investments that will further strengthen our franchise there and globally. As we look ahead to fiscal 2018, we are positioned for sustained growth and remain confident in our ability to continue delivering strong shareholder value.
For those that are new to the Visa “story,” it’s a good one. The company makes money every time a Visa user swipes his or her debit or credit card. Unlike rivals, Discover and American Express, Visa also doesn’t hold customer credit risk. The company benefits from two fantastic competitive advantages: a network effect and costly initial investment. For starters, Visa has more than 3.1 billion cards outstanding accepted by retailers across the world. The number is significantly higher than the number of Mastercards and many times the number of American Express cards outstanding.
The company’s network effect (or the concept that, as the number of Visa card users grows, it stimulates more merchants to accept Visa cards, which in turn then stimulates more consumers to use Visa cards, which then stimulates more merchant acceptance of them and so on…) took years, as well as billions of dollars to create–something that won’t, or arguably can’t, be easily be replicated by any new entrant. Most importantly, Visa generates incredible operating margins in the 60% range, leading to large levels of free cash flow generation. The company’s executive suite is also one of the most shareholder-friendly in our coverage universe.
Visa’s “moaty” business characteristics are near-impenetrable, in our assessment, and management expects the good times to continue in fiscal year 2018. Annual net revenue growth is expected in the high-single-digits on a nominal dollar basis, while the company’s annual operating margin is anticipated to be in the high-60s. This is just a fantastic level of profitability, matched by few other firms out there. Visa has a net debt position as a result of bringing Visa Europe into the fold recently, but free cash flow generation remains remarkable. Net cash provided by operating activities came in at $9.2 billion in fiscal 2017, up from $6.6 billion in fiscal 2015, while purchases of plant and equipment remain quite manageable, averaging ~$550 million during the previous three fiscal years. Free cash flow generation, as a percentage of operating revenue during fiscal 2017, was 46%!
Perhaps needless to say as the tone of this piece is clear, we like that Visa is leading the charge in the Best Ideas Newsletter portfolio. If the company ever stepped up its dividend payout, it may make for a great income idea, too, as dividend growth potential is absolutely phenomenal on the basis of our financial analysis. The company’s Dividend Cushion ratio, for example, is a whopping 5 times, and it last raised its dividend 18%+ on October 18, to $0.195/share per quarter. This is good for only a 0.7% dividend yield on a forward basis, so income investors may still have to be patient. Sure Visa may not be a great income stock at the moment, but the company may very well have one of the best business models ever created. We like it.