Why You Should Load Up on Visa During Times of Weakness
Visa (NYSE:V) has been an excellent investment over the past several years. The company has the benefit of being the leading company in the electronic payments industry, which is experiencing a secular bull market. People are using credit and debit cards more and more in relation to cash and checks, and each time they do one of just a handful of companies makes a small commission. While there is competition in the space there is essentially an oligopoly of Visa, Mastercard (NYSE:MA), American Express (NYSE:AXP), and Discover Financial (NYSE:DFS), and the latter two are also effectively banks.
Thus as electronic payments have grown so have Visa’s earnings. This is evident in the company’s third quarter earnings figures. The company grew its income to $1.4 billion for the quarter, up from $1.2 billion in the third quarter of 2013. This is impressive growth—14 percent, especially for a company whose sales are correlated to the global economy. The company’s earnings per share growth is even stronger: EPS came in at $2.17/share vs. $1.88/share, representing an increase of over 15 percent, thanks to stock repurchases.
However, while the company is growing the its large size along with deceleration in the global economy have taken their toll on its growth, which decelerated quarter over quarter. If you look at the company’s total number of transactions, which is the “apples to apples” comparison that Visa and its peers look at, you’ll find that in the first quarter year over year growth was 12 percent, whereas in the second quarter the figure dropped to 11 percent.
Now this is still impressive growth, and even if it decelerates further the company can grow its earnings in the double digits. With this in mind, I don’t think the stock is terribly expensive at 23 times earnings considering its large profit margins and industry dominance. However, investors sold off the shares, and they have yet to trade at a new high in 2014, which is a first for the company. Thus I wouldn’t be surprised if we saw additional weak price action in the shares. The stock peaked at around $235/share towards the beginning of the year before dropping to just below $200/share and rebounding to $225/share. The stock has since retreated and it looks like shares will trade back down. Investors can try to buy the stock at around $200/share, which is long term support and a psychologically significant buy point, although if this breaks I wouldn’t be surprised to se $170/share. However, if we saw that I would be buying aggressively.
On a side note I think that Visa’s growth deceleration could signal global economic weakness, and in particular economic weakness in the United States. Visa, more so than Mastercard gets its earnings primarily from the United States (Mastercard is more of an international play). Now Visa was still able to grow 12 percent in the first quarter despite the fact that the U. S. GDP dropped by about 3 percent. However, if the United States did grow in the second quarter, I would have expected stronger numbers from Visa. The fact that growth actually decelerated indicates that there is a strong possibility that second quarter GDP declined.
This is another reason to hold off on buying the shares for now. But there is no denying that Visa has all of the qualities that you should be looking for in a long term investment: it has strong cash-flow, a wide economic moat, and secular tailwinds that enable it to grow in any economic environment. With this in mind, it is a stock to load up on during periods of weakness.
Disclosure: Ben Kramer-Miller is long Visa.