Is Visa Inc Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Visa Inc (NYSE: V  ) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Visa's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Visa's key statistics:

V Total Return Price Chart

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

44.9%

Pass

Improving profit margin

13.9%

Pass

Free cash flow growth > Net income growth

100.1% vs. 65%

Pass

Improving EPS

86%

Pass

Stock growth (+ 15%) < EPS growth

217.8% vs. 86%

Fail

Source: YCharts. *Period begins at end of Q4 2010.

V Return on Equity (TTM) Chart

Passing Criteria

3-Year* Change

Grade

Improving return on equity

49.6%

Pass

Declining debt to equity

(18.8%)

Pass

Dividend growth > 25%

166.7%

Pass

Free cash flow payout ratio < 50%

13%

Pass

Source: YCharts. *Period begins at end of Q4 2010.

How we got here and where we're going
Visa comes through with flying colors, as it has racked up eight out of nine possible passing grades -- one of the best scores ever awarded to such a large company. Its only failing grade occurred because share price growth has outpaced gains in Visa's net income. However, Visa has boosted dividend payouts by a large amount over the past three years while keeping its cash flow payout ratio at a relatively low level, and it could still earn a perfect grade next year with minimal alteration of its current strategy. But can Visa continue to outperform in the future? Let's dig a little deeper to find out.

Visa recently reported better-than-expected revenue and earnings in its latest quarterly results on the back of rising payments volume growth and strong dollar exchange rates. The company also repurchased nearly 5.5 million shares for $1.1 billion in the first quarter of fiscal 2014, which helped buoy Visa shares. Fool contributor Jeremy Bowman points out that Visa benefited from JPMorgan Chase's agreement to move a number of MasterCard (NYSE: MA  ) customers to Visa's roster, but this alone wasn't the reason for Visa's rise.

According to the World Bank, global GDP is expected to grow by 3.2% in 2014, a much better clip than last year's 2.4% growth rate, and this higher growth is expected to hold up until 2016. Rival card issuer American Express (NYSE: AXP  ) tends to grow its aggregate billings 4.5 times as much as U.S. economic growth, which makes it and other card issuers a sort of leveraged play on improvements in the American economy.

Fool contributor Dan Carroll notes that U.S. consumer spending grew by 3.3%, above the overall 3.2% growth in GDP for the fourth quarter. As a result, Visa raised its full-year guidance for 2014 to project double-digit growth in both earnings and revenue.

Visa and MasterCard have also finally put a long-running legal battle behind them by agreeing to a $5.7 billion settlement over interchange fees. This allows Visa to concentrate on what might be another major legal battle with Target and other megaretailers, as several of the world's largest retailers rejected the settlement and its forced waiver of any future rights to sue.

Amazon.com (NASDAQ: AMZN  ) is one of the retailers to reject the settlement, and it also has plans to create its own branded Kindle-based checkout system. Should the famously disruptive and notoriously low-margin e-tailer figure out a way to develop its own payments network, it could seriously undermine Visa's growth in the United States -- and that's only one of several ambitious new payment-processing technologies now in development.

Are Visa's days numbered?
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