Visa Continues Its Strong Run of Dow Dominance

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Visa  (NYSE: V  ) shares are up 21.3% this year, besting the Dow Jones Industrial Average's (DJINDICES: ^DJI  ) own return of 15.3%. Those gains are good enough to leave Visa as the eleventh strongest performer on the Dow this year. With markets generally up across 2013, most Dow components have been on fire; only three of the Dow's 30 stocks have negative returns so far this year. Yet, Visa's 2013 performance follows up a decade of extreme out-performance. Across the past five years, the company's shares have jumped 268%, the third best performance of all Dow stocks. Let's take a look at what has been driving Visa's performance. 

Continued sales gains 

Visa's success begins with the top line. Across the past five years it puts up compounded sales growth of 15.8%. That's number one across all Dow stocks by a wide margin. 

Highest  Annualized Sales Growth Among Dow Stocks
Visa 15.8%
Merck & Co. (NYSE: MRK  ) 13.2%
The Coca-Cola Company 8.6%
UnitedHealth Goup 8.4%
JPMorgan Chase & Co.  8.3%
Nike,  5.9%

Source: S&P CapitalIQ, a division of Standard & Poor's

In total, Visa has grown trailing sales to $11.5 billion in the past five months versus a comparable figure of $5.5 billion a half decade ago. 

Earnings gains follow

Visa had negative earnings five years ago thanks to legal writedowns. Yet, by looking at operating income, we can see what level of profits the business was bringing in before any accounting writedowns such as legal settlements. Once again, we see metric where Visa is far and away the Dow's best performer. 

Highest  Annualized Operating Earnings Growth Among Dow Stocks
Visa 24.1%
Nike,  7.4%
Merck & Co.  7.2%
McDonald's Corp. 6.9%
The Home Depot, 6.3%
The Coca-Cola Company 5.9%

Source: S&P CapitalIQ, a division of Standard & Poor's

The "lead" Visa enjoyed in sales growth versus its Dow peers expands even further. While the company was able to more than double sales across the past decade, its SG&A expenses (employee payments, advertising, etc.) only increased 11%. The end result was ballooning profit margins. 

Keep those earnings multiples high

One final area to look at is how Visa's earnings multiples have fluctuated throughout time. As a quick example, if a company traded for a P/E of 20 a year ago and doubled profits, it could be trading at a P/E of 10 today and its shares would be flat in spite of its huge earnings gains. 

As one quick example, Apple  (NASDAQ: AAPL  ) saw operating earnings grow at an annualized rate of 27.7% across the past two years, a rate which leaves Visa's 16% across the same time period in the dust. Yet, in terms of share performance Visa's shares have gained 119% across the past two years while Apple shares are up 16%. The reason? Apple's P/E has been contracting. Across the past two years it went from 16 down to 12. 

While Visa had negative earnings five years ago-and thus no P/E ratio-by the summer of 2010 it was trading for an average P/E of about 24. Today, Visa's P/E is... 23, essentially unchanged across the past three years. The key takeaway here being that investors are willing to pay just as high a price for Visa today as they were three years ago in spite of the company growing in size. With a company like Apple, fears of competition and remaining growth ahead have led investors to pay less for the company.

In Visa's case, its current size doesn't look to be as great a challenge. Last quarter it grew sales growth of 17% and operating profit of 22%. Not only that, but "disruptive" threats in payments have largely been to Visa's betterment in recent years. Consider a start-up like Square which only further encourages the spread of credit card processing. 

The biggest winners in the market

At the end of the day, Visa has managed to pull off a feat with few peers. As a gigantic company (its now worth more than $100 billion), its seen some of the highest earnings growth in the market, but still has investors excited about its future. With a P/E that's back closer to 20 and sales growth largely in the 10% to 17% range across the past 10 quarters, the shocking part is that after all of Visa's out-performance across the past half decade, it looks pretty attractively priced today. 

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9/27/2016 4:45 PM
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