Visa Is a Better Buy Than You Think

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

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

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

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.

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