Stock of the Week
NYSE Symbol: V
Industry: Credit Cards
Price as of 4/9: $58.79
A surprise preannouncement by Wells Fargo, raising guidance for the first quarter, sent the financials and the major averages shooting higher on Thursday. No one believes we're out of the woods yet regarding the housing and banking problems, but hopefully things won't get much worse. Within the financials, there are plenty of winners and losers. Citigroup looks like one of the biggest losers thanks to heavy dilution, but the former investment banks like Goldman Sachs and Morgan Stanley will be winners. JP Morgan will be one of the biggest winners among the large multinational banks. However, there is another sector, the credit card providers and processors that provide good upside and limited downside once we get out of this financial crisis. The featured stock of the week is Visa. The success of MasterCard's IPO three years ago gave Visa the incentive to come public last year. The stock performed great before the economic downturn took hold. As
mentioned, Visa and MasterCard merely process credit card transactions allowing the big banks to take all the credit risk from customers not paying back their loans. The future is bright for Visa and MasterCard thanks to the worlds' progression to using more plastic and less currency, check books, and other forms of payment methods.
Barron's wrote a positive piece on Visa a couple of weeks ago, highlighting similar tailwinds that should provide a powerful lift to Visa's earnings and shares in the future. Barrons indicated that the stock could trade up to the $70 range, even in this difficult economy. Both Visa and MasterCard generate pretax profit margins exceeding 40%, steady top-line growth which easily translates into earnings-growth rates exceeding 15%. For Visa, margin expansion and conservative revenue expectations could produce $5 to $6 of earnings in five years. Visa has the flexibility to modulate spending to protect or increase its margins. That means it has room to meet or exceed current earnings forecasts, making the shares not as expensive as they appear.
Currently the stock trades for 21 times earnings, 18 times next years numbers, and 6 times sales. The stock also trades for 2 times book value of $28.66 a share. The company has $3 billion in cash and virtually no debt. This is obviously not your typical value stock, but the future is bright for the credit card industry. Any one that missed Visa on it's IPO is getting a second chance to get in on the ground floor.