Despite my belief that Michael Phelps will produce squat for its bottom line, I happen to love Visa (NYSE: V).
There're only a handful of forces that create truly valuable moats, and Visa is the epitome of one of the big ones -- the network effect. In short, so many merchants around the globe accept Visa that nearly every merchant has to accept it, or else customers would quickly revolt. The near-duopoly Visa shares with rival MasterCard (NYSE: MA) is a treasure, to say the least.
The shares have performed extraordinarily well since Visa's IPO in March, and it's obvious why: Economies from Shanghai to Salzburg have enjoyed multiyear booms that have fueled Visa to new heights. Revenue and earnings growth are blowing out the doors, thanks to consumers transitioning to a cashless society, as well as global economic growth helping to turn millions of people who had been poor into spend-happy consumers. Everybody, let's hold hands and buy something!
All right, now let's tear this puppy apart
How much longer will that global growth continue? While the world economy isn't falling off a cliff just yet, it appears to be running toward one, at least. Goldman Sachs now reports that half the globe is either already in or on the brink of a recession, including the U.S., Japan, Europe, and the U.K., which collectively make up the overwhelming majority of Visa's revenue (note: Visa Europe isn't included in the public shares).
Luckily for Visa, a recession isn't the tragic scenario it is for others, like Bank of America (NYSE: BAC), Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), and even American Express (NYSE: AXP). Visa makes money on transactions, not lending. A global slowdown will lead to less of an increase in Visa's bottom line, but growth is still there, nonetheless. The second quarter brought 22% total volume growth, with Latin America/Caribbean business growing 37.8%, Asia ratcheting up 29.4%, and even the sluggish U.S. market growing 10.9%. If there's a financial company with immunity to an ailing economy, it's Visa.
Now for the other side of the equation
Visa is a one-in-a-million company, no doubt about that. Unfortunately, nobody is handing you that success for free. At 33 times this year's earnings estimates and 27 times 2009 estimates, you're right to question whether the hype of the recent IPO has blown shares to levels that will crowd out performance in the years to come.
Currently, analysts expect annual growth of 22.22% for the next five years. Depending on how chipper you are, you could take this as a sign that investors are expecting the impossible, or that Visa is truly an explosive growth story. Everyone knows the outcome of the first scenario, but what would this stock look like down the road if the gargantuan growth comes true?
Assuming the gangbusters 22.22% annual growth analysts predict, by 2010, earnings per share would be in the neighborhood of $3.30. By the next presidential election in 2012, EPS should hover around $4.90. Success! Right?
Eh, perhaps. Let's first acknowledge that 22.22% growth is hardly sustainable in perpetuity. Markets mature, competition increases … it's what happens after a while. Even Methuselah gave in to the pressures of aging. Whatever earnings multiple investors want to attach to Visa down the road, it's bound to be less than the current 33 times.
What's left for you?
Assuming everything goes well, EPS would sit at around $4.90 four years down the line, so let's give Visa a multiple of 22 in 2012, a third off of today's high multiple -- still a healthy level signifying more future growth, a huge premium over what American Express and Discover Financial (NYSE: DFS) trade at, and not much less than rival MasterCard trades for today, mind you. At that rate, shares would fetch around $107, for a grandiose return of 9.5% per year from today's prices: not peanuts, but almost certainly a pittance compared to what giddy investors are holding out for. To answer the question of "How much future success is already priced into the stock?" the answer might be "Darn near all of it."
I'm done ranting. Your turn.
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