While Mr. Market, a proxy for investor psychology, moves markets in an often unpredictable fashion, the only real, sustainable driver of a growing stock price in the long term is earnings growth.
So, why is it that Visa Inc.’s (V, Financial) share price is stagnating, even as its earnings keep growing? Over the past three years, earnings per share without non-recurring items has increased by an average of 9.6% per year.
This earnings growth may be the glue that kept the gurus invested in Visa stock as well. There were 37 gurus invested in Visa as of the quarter's end, according to there 13F reports. Could the depressed price indicate it is a value stock?
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
As this three-year price chart indicates, the share price has struggled since hitting a high of $250.93 on July 27, 2021 (at the close of trading on Mar. 17, the price was just $217.39).
Coincidentally, July 27 is also the date the company released its third quarter 2021 earnings report. That quarter also included two major acquisitions: Tink AB for $2 billion and Currencycloud for $962 million.
Visa warned in that release that it was uncertain about the remainder of the fiscal year that would end on Sept. 30. “Given the continuing impact of Covid-19 and the significant uncertainty in the global economy, it is difficult to reasonably estimate the Company's annual results; therefore we are not providing a fiscal full-year 2021 outlook at this time.”
Management had provided the same reason in the previous two quarters for not providing an outlook. And if all that wasn’t enough for one quarter, the U.S. Department of Justice launched an investigation into its (and Mastercard’s (MA, Financial)) routing practices. Concern about that issue seems to have subsided.
Writing in the Wedgewood Partners’ fourth quarter 2022 letter, guru David Rolfe (Trades, Portfolio) noted:
“Visa rebounded as the Company continued to report strong growth, while concerns about potential adverse legislation related to its credit card routing practices receded as U.S. legislators failed to take action. Although Visa is not totally free from legislative risk, the Company's value proposition to merchants as well as bank issuing customers and acquirers is robust enough to help blunt the potential effects any future legislation might portend. Over a multi-year time horizon, it would be difficult for any currently nonexistent or even subscale credit routing network to add the value that Visa (or MasterCard) can already add today, legislative fiat notwithstanding.”
Getting back to the acquisitions, they are likely contributing to the way Visa’s debt load has grown:
For the fiscal year ended Sept. 30, 2016, long-term debt went from zero to $15.882 billion. What happened that year? It bought a former subsidiary, Visa Europe, for $23.90 billion in cash and stock.
Overall, the company has made 14 acquisitions since then, including eight in the past five years. That’s helped the company maintain its growth, but it clearly hasn't done as much for the share price.
Visa is now considered modestly undervalued by the GF Value chart, which estimates an intrinsic value of $276.73 compared to the March 17 closing price of $217.39.
Its price-earnings ratio of 30.4 is significantly higher than the credit industry average of 11.91, and its five-year Ebitda growth rate of 10.50% is not enough to pull the PEG ratio of 2.91 into fair value territory. The fair value range is 1.00 to 2.00.
Since Visa has a GuruFocus business predictability rank of 5 out of 5 stars, we can use the discounted cash flow calculator with confidence. Based on its EPS without NRI growth rate of 19.70% per year for the past decade and estimating a discount rate of 10%, the DCF calculator sees a small margin of safety if the company keeps growing at the same pace:
On the pricing side, then, we might say that Visa is somewhat undervalued, but not enough to be a compelling bargain.
What’s left to attract investors if we rule out the company as a value candidate? In the short term, not a lot. Visa pays only a small dividend yielding 0.76%, which is well below the S&P 500 average. It does buy back its own shares, but not enough to make much difference for shareholders. And as the price chart shows, capital gains have been iffy for the past year and a half.
Despite the unattractive valuation, there's no doubt in my mind that the company has great long-term prospects. This outlook is strengthened by the GF Score of 98 out of 100. According to a historical study by GuruFocus, stocks with higher GF Scores have a better chance to outperform.
Despite increasing debt, the company has an interest coverage ratio of 37.32 and a Piotroski F-Score of 8 out of 9, so it still has a solid financial base.
Growth rates for revenue, Ebitda and EPS without NRI are generally on par with the industry’s. It seems its acquisitions are doing what they were supposed to do:
Finally, Visa exists in something of an oligopoly with Mastercard. Because of their size, it seems unlikely either company will be seriously challenged in the next few years.
All in all, it is no surprise that Visa is still a guru favorite, even though it is far from being a value stock. Patient investors like the gurus can wait while Mr. Market catches up to the growing earnings. When that happens, they should be handsomely rewarded.
