Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. 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 companyÂ or by reviewingÂ 5 Undervalued Companies for the Enterprising Investor.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 Inc. (V) 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, financial institutions and governments in more than 200 countries and electronic payments. The Company operates in Payment Services. The Company operates processing networks VisaNet, which facilitates authorization, clearing and settlement of payment transactions worldwide. It also offers fraud protection for account holders and assured payment for merchants. The Company operates an open-loop payments network in which Visa connects and manages the exchange of information and values between: issuers, which includes financial institutions that issue Visa-branded cards or payment products to account holders, and acquirers, which includes financial institutions that contract with merchants to accept Visa-branded cards or payment products.
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||$93.45|
|Value Based on 0% Growth||$54.78|
|Market Implied Growth Rate||11.84%|
|Net Current Asset Value (NCAV)||-$2.32|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Visa is suitable for Enterprising Investors but not yet for Defensive Investors. Â The Defensive Investor has a number of requirements that need ten years of existence as a publicly traded company, and while Visa has been around for a very long time, it has not been publicly traded for all that long. Â However, Enterprising Investors have a shorter time horizon, and the company passes all of the requirements for that investor type. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors. Â From a valuation standpoint, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.00 in 2010 to an estimated $6.44 for 2014. Â This level of demonstrated growth is in line with the market’s implied estimate of 11.84% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.
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 aÂ 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 in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.