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Why Visa Is a Buy After Ending 2019 on a High Note

By Nicholas Rossolillo – Feb 2, 2020 at 11:10AM

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Revenue and earnings increases are as good as clockwork.

As long as cash remains the majority method of payment around the globe, the digital payments industry will remain a disruptor and in growth mode. That goes for the biggest name on the block, Visa (V -1.23%), which posted yet another quarter of upside after finishing the decade since the financial crisis of 2008-9 (and the year Visa had its IPO) on a strong note. In spite of its massive size, the digital payments leader is still managing double-digit top- and bottom-line expansion, and it is forecasting the trend will continue for the foreseeable future. This stock deserves to be a core holding for investors of all types.

A woman next to an illustrated thought bubble with a bag of cash inside.

Image source: Getty Images.

An eventful end to a challenging year

During its 2019 fiscal year (the 12 months ended Sept. 30, 2019), Visa's revenue and adjusted earnings grew 11% and 18%, respectively -- with a 13% and 21% rise in the two metrics during Q4. The company made five small acquisitions from December 2018 through the summer of 2019 that helped boost results, but let's not take too much away from the headline numbers. 2019 was a challenge as global economic growth cooled off due to political tensions and trade disputes, which lower transaction activity.

The economic cooldown continued in the final quarter of calendar year 2019 (which corresponds with Visa's fiscal 2020 Q1) and did take a small toll on the report card, but it wasn't enough to throw off the global payment network's double-digit trajectory. 

Metric

3 Months Ended Dec. 31, 2019

3 Months Ended Dec. 31, 2018

Change

Revenue

$6.05 billion

$5.51 billion

10%

Operating profit margin

66.3%

67.5%

(1.2 pp)

Earnings per share

$1.46

$1.30

12%

Data source: Visa. Pp = percentage point.   

Look beyond the premium valuation

In spite of rock-solid and consistent returns, some say Visa is a pass because of its valuation. After more than a decade of relentless gains, the stock trades for 37.6 times trailing-12-month earnings and 27.7 times expected one-year forward earnings.  

However, built into those high earnings multiples is the reason shares are a buy anyway. The forward price-to-earnings ratio implies a double-digit advance for the bottom line in the year ahead, and management did, in fact, reiterate that expectation on its Q1 report. Full-year 2020 revenue growth is expected to accelerate to a low-double-digit rate, as are earnings, with a 12% to 14% growth rate forecast. Both assumptions exclude any positive impact from the $5.3 billion takeover of fintech company Plaid announced in early January (and incomplete as of yet).

Which is another reason to buy Visa. Sure, the stock trades at premium pricing, but operating profit margins are over 65%. Visa is able to use those profits to invest in high-growth acquisitions like the Plaid deal, all the while returning massive amounts of cash to owners of the stock. During Q1 alone, the company returned $3 billion to shareholders via its dividend (currently yielding 0.6% a year) and share repurchases. A new $10 billion share repurchase program was also announced, which equates to 2.2% of Visa's current $445 billion market cap.

Put simply, Visa -- as well as rival Mastercard -- is one of the best mega-cap stocks around, and it is well on its way to one day joining tech titans like Apple and Microsoft in the trillion-dollar valuation club. With another year off to a promising start, I'm picking up more shares for the long haul as the war on cash continues.

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Nicholas Rossolillo and his clients own shares of Apple, Mastercard, Microsoft, and Visa. The Motley Fool owns shares of and recommends Apple, Mastercard, Microsoft, and Visa and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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