Babylon Capital Quality & Valuation Analysis On Visa | Why Visa May Be Poised For A Breakout After 2 Years Of Consolidation

Published

2 years ago

August 3, 2023

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Visa V has been in consolidation for two years, since trading at an all-time high of $252.67 on July 27, 2021.This was warranted considering that V was trading 37x earnings, significantly higher than its typical range of 25x 30x earnings. Now that the fundamentals have caught up to its stock price, V may be poised for a breakout. *NTM Price to Earnings Ratio: 26.67x *10-Year Mean: 27.79x *NTM Free Cash Flow Yield: 3.80% *10-Year Mean: 3.87 %

Today, investors are forecasted to receive ~4% more in earnings per share and a free cash flow yield that is in-line with its 10-year average. Considering its fundamentals, V appears to be fairly valued and has attractive growth potential going forward.

Before analyzing Vs valuation further, lets have a look at why V is a high-quality business. Balance Sheet Cash & Short-Term Investments: $16.59B Long-Term Debt: $20.60B

V has a strong balance sheet, evident from its AA- S&P Credit Rating.Return On Capital 2017: 21.6% 2018: 24.6% 2019: 27.5% 2020: 21.4% 2021: 24.3% 2022: 30.8% LTM: 32.1% Return On Equity 2017: 20.4% 2018: 30.9% 2019: 35.2% 2020: 30.7% 2021: 33.4% 2022: 40.9% LTM: 42.4%

Vs return metrics are stellar, highlighting the financial efficiency of the business.Revenues 2015: $15.91B 2016: $17.66B 2017: $18.35B 2018: $20.60B 2019: $22.97B 2020: $21.84B 2021: $24.10B 2022: $29.31B CAGR: 9.12% Free Cash Flow 2015: $6.17B 2016: $5.05B 2017: $8.61B 2018: $12.22B 2019: $12.02B 2020: $9.70B 2021: $14.52B 2022: $17.87B CAGR: 16.40% Net Income(Earnings) 2015: $6.32B 2016: $5.99B 2017: $6.69B 2018: $10.30B 2019: $12.08B 2020: $10.86B 2021: $12.31B 2022: $14.95B CAGR: 13.08%

Over the past 7 years V has been able to grow its revenues, free cash flow, and net income at appreciable rates.ShareBuybacks 2013 Shares Outstanding: 2.62B LTM Shares Outstanding: 2.11B

By decreasing the number of its shares by about 20% in the last 10 years, V managed to boost its earnings per share by 25% (assuming no growth). This means that each share now represents a larger portion of the company's earnings, resulting in increased profitability for investors.

As you can see, V is a high-quality business with a wide moat.

Now lets shift our focus to its valuation.

Benjamin Graham, widely regarded as the father of value investing, advocated for a principle known as the "2G" rule. According to Graham, investors should not pay more than twice the growth rate (2G) of a business.

For instance, if a company is projected to achieve a 10% compounded annual growth rate (CAGR) in earnings over the next five years, a price-to-earnings (P/E) ratio of 20x might be considered reasonable. However, if the expected earnings growth rate is 5% compounded annually over the same period, a P/E ratio of 20x would be considered unreasonable, as the investor would be paying four times the growth rate.

With a multiple of 26.67x, V would need to achieve approximately a 13.34% CAGR in earnings over the next five years to justify its current valuation. Interestingly, this growth target is slightly below the forward estimates, suggesting that V has the potential to meet or slightly surpass the markets expectations.

V is scheduled to announce its quarterly results after the market closeon July 25, 2023. The anticipation of an earnings beat or a positive earnings report has the potential to serve as a fundamental catalyst, that could propel V's shares to reach new all-time highs.

*The valuation data utilized in this article is subject to potential changes and may not reflect current market conditions or future developments beyond the time of submission for publication.

Disclosure: I am long V. Babylon Capital, its representatives, and client(s) have positions in the securities discussed in this article. The information contained in this article is intended for informational purposes only and should not be construed as investment advice to meet the specific needs of any individual or situation. Past performance is no guarantee of future results. Information contained in this article has been obtained from sources believed to be reliable but is not guaranteed as to completeness or accuracy.

Politics

The evolution of crypto payments and what lies ahead

Published

11 mins ago

February 7, 2025

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The evolution of crypto payments and what lies ahead

From Bitcoin to stablecoins, what’s next for digital currency? Stablecoins will continue to play a fundamental role in crypto payments, and their important role will only grow.

Technology

Trump delays cancellation of de minimis trade exemption targeting China imports

Published

33 mins ago

February 7, 2025

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Trump delays cancellation of de minimis trade exemption targeting China imports

Employees package and sort express parcels at an e-commerce company on Nov. 1, 2024, around the Double 11 Shopping Festival in Lianyungang, Jiangsu Province of China.

Vcg | Visual China Group | Getty Images

President Donald Trump signed an executive order on Friday that puts a pause on his closing of the de minimis trade exemption, a provision commonly used by Chinese e-commerce companies Temu and Shein.

The order states that de minimis will be restored for small packages shipped from China, “but shall cease to be available for such articles upon notification by the Secretary of Commerce to the President that adequate systems are in place to fully and expediently process and collect tariff revenue” on those items.

Trump on Saturday suspended the exemption as part of new tariffs that include an additional 10% tax on Chinese goods. The nearly century-old exception, known as de minimis, has been used by many e-commerce companies to send goods worth less than $800 into the U.S. duty-free, creating a competitive advantage.

It was predicted that its removal could overwhelm U.S. Customs and Border Protection employees, as the mountain of low-value shipments already making their way into the U.S. would suddenly require formal processing.

De minimis has helped fuel an explosion in cheap goods being shipped from China into the U.S. CBP has said it processed more than 1.3 billion de minimis shipments in 2024. A 2023 report from the House Select Committee on the Chinese Communist Party found that Temu and Shein are “likely responsible” for more than 30% of de minimis shipments into the U.S., and “likely nearly half” of all de minimis shipments originate from China.

Critics of the de minimis provision say it’s provided an unfair advantage to Chinese e-commerce companies, and created an influx of packages that are “subject to minimal documentation and inspection,” raising concerns around counterfeit and unsafe goods.

The Biden administration proposed a new rule last September to curb the “overuse and abuse” of de minimis. The rule proposes to strengthen the CBP’s information collection requirements for de minimis shipments.

Environment

Tesla increases Model X price, brings back incentive Elon Musk said was ‘not coming back’

Published

1 hour ago

February 7, 2025

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Tesla increases Model X price, brings back incentive Elon Musk said was 'not coming back'

Tesla has increased Model X prices and brought back an incentive that CEO Elon Musk said was unsustainable and “not coming back to any vehicles.”

Today, Tesla updated its Model X configurator in the US to raise the prices of the electric SUV by $5,000.

The new prices are $84,990 for the Long Range version and $99,990 for the Plaid version:

The price increase means the Model X ino longer qualifies for the $7,500 Federal EV tax credit as it now exceeds the $80,000 price cap for electric SUVs.

But with the price increase, Tesla is ramping up the incentives.

Tesla brings the price down by $1,000 with a referral code, it gives one option for free if you buy the Full Self-Driving package, and it is bringing pack “free Supercharing for life.”

The latter, Tesla stopped offering because CEO Elon Musk said it was unsustainable.

Back in 2020, the CEO said that it will “not come back to any [Tesla] vehicles”:

“Just us being fools, but free Supercharging forever is not coming back to any vehicles. It’s not a good incentive structure.”

However, it did bring it back last year as an “end-of-the-year incentive.”

But now, Tesla is bringing it back for Model S and Model X, and it applies to orders from the US, Canada, Puerto Rico, Europe and Middle East.

Tesla has made some changes to the program. Instead of being linked to the vehicle, meaning free Supercharging would remain if you sell it, it is now attached to your Tesla account.

The automaker also says that it doesn’t apply to vehicles used for commercial purposes:

“Customers who purchase or lease a new Model X are eligible for free Supercharging during your ownership of the vehicle. Offer is tied to your Tesla Account and cannot be transferred to another vehicle, person or order, even in the case of ownership transfer. Used vehicles, business orders and vehicles used for commercial purposes (like taxi, rideshare and delivery services) are excluded from this promotion.”

However, Tesla also said that the last time, but it is hard to enforce.

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