Visa is a company that has permeated nearly every location on the planet. Â One can travel almost anywhere and be able to use a Visa card as payment for goods and services. Â This is an excellent quality for a company, especially one that’s product is a payment system. Â However, Intelligent Investors must keep in mind that investment analysis requires a review of the financial statements to determine the company’s risk level and intrinsic value. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Visa fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Visa Inc. (Visa) is a global payments technology company that connects consumers, businesses, banks and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. The Company operates processing networks, VisaNet, offering fraud protection for consumers and assured payment for merchants. The Company operates an open-loop payments network, a multi-party system in which Visa connects issuing financial institutions, or issuers, that issue cards to cardholders, and acquiring financial institutions, or acquirers, that have the banking relationship with merchants-and manage the exchange of information and value between them. The Company derives revenues primarily from fees paid by its clients based on payments volume, transactions that it processes and other related services the Company provides. Its clients deliver Visa products and payment services to consumers and merchants based on product platforms it defines and manages.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 1/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$94.90|
|Value Based on 0% Growth||$55.63|
|Market Implied Growth Rate||13.02%|
|Net Current Asset Value (NCAV)||-$2.32|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGrahamÂ
Visa is not suitable for the Defensive Investor because it has not had a long enough history as a publicly traded company. Â The Defensive Investor requires ten years of publicly traded status before it may be suitable, as that helps ensure the reliability of the financial data. Â The Enterprising Investor is not as strict, however, and Visa passes all of the requirements for this investor type. Â As a result, value investors seeking to follow the Enterprising Investor portion of the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company. Â Such research might include a review of ModernGraham’s analysis of MasterCard (MA). Â From a valuation perspective, the company has grown its EPSmg (normalized earnings) from $0.83 in 2009 to an estimated $6.54 for 2014. Â This is a solid level of growth that definitely supports the market’s implied estimate for growth of 13.02%, but the ModernGraham valuation model returns an intrinsic value estimate within a margin of safety as the price. Â As a result, the company appears to be fairly valued at the current time, but not undervalued.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Visa Inc. (V)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave a comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author did not hold a position in Visa Inc. (V) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.