I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series.

Next up: Visa (NYSE: V). Is this credit card financier the real thing? Let's get right to the numbers.

Foolish facts

Metric

Visa

CAPS rating (out of 5) ***
Total ratings 4,691
Percent bulls 94.6%
Percent bears 5.4%
Bullish pitches 844 out of 906
Highest rated peers Broadridge Financial Solutions, DST Systems, Western Union

Data current as of Dec. 12.

Consumers may be wising up to the impact of disastrous credit and debit offers such as the Kardashian sisters' ill-fated shopping card, but that hasn't stopped Visa from raking in billions in profits and free cash flow.

Visa produced more than $1.6 billion in FCF over the trailing 12 months alone -- more than enough to fund a $1 billion stock repurchase, a dividend that yields 0.7% as of this writing, and the essentials of a global operation that produces more than $8 billion in revenue annually. Many Fools like that combination.

"No matter what the dollar does, you will still require credit in every day life. Plus a nice little dividend," All-Star investor wrote blesto in October.

Fair point. After several months of reductions, Federal Reserve data show that U.S. consumers added $3.3 billion in new debt in October. Surely some of that was accumulated using Visa cards.

The elements of growth

Metric

Last 12 Months

FY 2010

FY 2009

Normalized net income growth 14.8% 42.6% 121.6%
Revenue growth 16.7% 10.3% 74.5%
Gross margin 84.8% 82.2% 79.0%
Receivables growth (16.3%) (28.8%) 477.6%
Shares outstanding 715 million 726 million 725 million

Source: Capital IQ, a division of Standard & Poor's.

Judging by the numbers, Visa is getting at least its fair share of consumer spending dollars. Let's review:

  • While both revenue and normalized net income growth have been inconsistent, there's no doubting the profit recovery that Visa has enjoyed over the past year.
  • At least some of that has to do with higher margins. Since 2008, Visa's gross profit margin has risen 5 percentage points. Return on equity is up by almost as much over the same period.
  • I'm also pleased to see receivables growth going negative after a massive increase at the outset of the recession. The implication? Visa is doing a better job collecting on debts, and cash is flowing as a result.
  • Shares outstanding fell sharply during fiscal 2010, thanks to management's repurchasing of 12.9 million shares at an average price of $77.52 each.

Competitor and peer checkup

Company

Normalized Net Income Growth (3 yrs.)

American Express (NYSE: AXP) (7.9%)
Discover Financial Services (NYSE: DFS) (20.1%)
Green Dot Corp. (Nasdaq: GDOT) Not available
MasterCard (NYSE: MA) 31.7%
Total Systems Services (NYSE: TSS) (9.9%)
Visa 53.7%

Source: Capital IQ, a division of Standard & Poor's. Data current as of Dec. 13.

On the basis of normalized net income, Visa is easily the best growth story in this table. No one gets close, not even MasterCard. And yet, to be fair, we can't assume growth will continue at anything approaching that pace. A new blast of economic headwinds would surely stall Visa's momentum.

Grade: Unsustainable
So should investors worry? I'm not sure about that, either. At 20 times normalized earnings, Visa is priced about in line with its primary peers -- American Express, Discover, and MasterCard.

What's more, the company has made progress in paying off litigation reserves that have taken a bite out of its already-substantial cash from operations. What was a $3.8 billion balance of legal liabilities in 2008 has shrunk to about $1 billion today. Presuming Visa doesn't face a perpetual string of suits, this balance should continue to decline and cash flow should continue to increase.

Calling Visa a sustainable growth story is probably going too far; the economy's just too fragile. But with a fair valuation relative to peers, and strong and rising cash flows, I see enough business momentum here to add the stock to my CAPS portfolio.

Now it's your turn to weigh in. Do you like Visa at these levels? Let us know what you think using the comments box below. You can also ask me to evaluate a favorite growth story by sending me an email, or replying to me on Twitter.

Interested in more info on Visa? Add it to your watchlist by clicking here.

American Express, Discover Financial Services, and Western Union are Motley Fool Inside Value picks. Western Union is also a Motley Fool Stock Advisor selection. Motley Fool Options has recommended subscribers write a covered strangle position in Western Union. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of and has written puts in Broadridge Financial Solutions. The Fool is also on Twitter as @TheMotleyFool. Its disclosure policy thinks Monty Python is sustainably funny.