Now Is A Great Time To Buy Visa Stock

There is a consistent pattern displaying itself in our Green Screens.

We've seen over and over how just a handful of industries / business types are screening out for revenue growth and strong cash flow generation. As a result, the screens frequently consist of several companies in these industries showing up at the same time.

This isn't unexpected. One of Warren Buffett's famous quotes is:

"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."

Simply put, the economic characteristics of a business are FAR more important (in most cases) than any individual advantages or leadership within a particular company.

One of this site's key aims has been identifying which of these industries are truly excellent economically, and which ones are getting screened because of short-term, unsustainable macro-economic tailwinds that are unlikely to continue for decades to come.

On the one hand, this has led us to reject large groups of stocks in the oil & gas sector, or the regional banks.

On the other hand, I'm more than happy to add multiple stocks in cybersecurity or e-commerce to the portfolio. These are both industries with excellent financial metrics, great long-term growth prospects, and built-in economic moat characteristics.

So today, we're going to take a look at a stock that is a direct competitor to an existing Watch List company. So direct, in fact, that the two companies are almost identical.

This won't be a strange name to anyone. Visa (V) recently showed up in the Green Screens and immediately piqued my interest. Sure, it is very similar to existing Watch List stock Mastercard (MA), but it is worth taking a look at because it is simply an incredible business. Let's get into it.

Visa and Mastercard - The Coke and Pepsi of Credit Cards

Let's save a lot of time here. If you want to understand Visa's business, simply go read through the in-depth Mastercard review posted a few months ago. These two companies have virtually identical businesses and earn revenue in exactly the same ways.

Together, the two companies process an unbelievable 90% of worldwide credit and debit card transactions (60% Visa, 30% Mastercard). This creates a nearly unassailable NETWORK EFFECT for both firms. Merchants absolutely have to accept them, because nearly all consumers carry one or both types of cards. Competition is mostly theoretical. American Express (AMEX) is third with about 9% share, and there have been no new serious competitors since Discover (DISCA) entered the market with little success back in the 1980's.

Because they are so similar, let's chart out the key metrics for each firm to get a better comparison (fiscal year 2022 figures):

It's pretty clear from this table that in nearly every metric, Visa outshines its smaller competitor. Visa is larger, growing more rapidly, generates a substantially higher free cash flow margin, buys back more shares, and pays a slightly higher dividend yield. Mastercard has a better ROIC figure because it has been less acquisitive (e.g. more of its growth is organic), but Visa's figure at 32.5% is still impressive for such a large firm.

We've already established from our Mastercard review that these large credit card processors have fabulous businesses, and now we've found an even better company to potentially invest in! That's exciting. But let's cover a few company-specific aspects first.

Leadership and Financial Strength

It is actually another parallel that both of these firms are going through a leadership transition. Mastercard announced a new CEO in 2021, and Visa followed suit this year.

Ryan McInerney took over the CEO role for Visa about a month ago, replacing Alfred Kelly, who had been CEO since 2016. McInerney's resume is a solid one. He has been President of Visa since 2013, boasting a decade of high-level experience in the business. Before that he had leadership roles at JPMorgan Chase, and was a principal at McKinsey's respected banking and payments unit. At just 47 years old, McInerney looks poised to lead the company for many years to come.

Alfred Kelly is remaining as Executive Chairman in the meantime, so leadership continues to look like a strength here.

Financially, Visa is a stalwart. Its 60%+ free cash flow margin is simply unheard of in almost any business, let alone one with almost $30 billion in annual revenues. Although Visa has been a relatively acquisitive company, its debt-to-equity ratio has held steady at a reasonable 50% over the last decade. The firm pays a small dividend just under 1%, and steadily buys back shares at about 2% annually. There is currently $14 billion remaining in its buyback program, which is routinely increased year after year.

I don't see any particular red flags here. Visa has a talented and experienced leadership bench and incredibly impressive and steady financial metrics.

Risks

Once again, the same risks basically apply for Visa that do for Mastercard.

Regulation is easily the biggest. The oligarchy in consumer credit and debit cards, and its resulting high profit margins, has not gone unnoticed by governments worldwide. The 2010 "Durbin Amendment" settled an anti-trust lawsuit, "swipe fees" have been capped in Europe since 2015, and challenges to interchange and cross-border fees have been a consistent thorn in the industry's side ever since. Any successful legislation that limits the company's ability to charge payment fees is a serious risk to an investment.

Visa has also seen increased scrutiny around its acquisition strategy. The Department of Justice filed an antitrust lawsuit against its proposed $5.5 billion acquisition of fintech innovator Plaid in 2020. Ultimately, the two companies decided to just cancel the deal rather than fight the suit. Visa has utilized acquisitions as a key growth strategy, and continued challenges like this could mute their ability to grow revenues.

Visa also faces challenges typical of any other business. Global economic recessions, for whatever reason, will slow consumer spending. Data privacy breaches are a risk, particularly with sensitive payment information. Competition has exploded in financial technology ("fintech"), although many of these new solutions sit on top of the credit card networks instead of competing directly with them. Still, solutions like PayPal, Venmo, Square's (SQ) Cash App, and others have "wallet"-based payment solutions that can bypass the card providers entirely.

Overall, I would consider Visa a "medium-low" risk investment compared to our typical Watch List stock.

Conclusion

There's no question Visa is a "green dot" stock, but it is fair to ask: "why add Visa when Mastercard is already in the Watch List".

The answer is a simple one: Visa looks a lot more attractively valued as a stock right now!

Currently, Visa and Mastercard trade at an identical price-to-sales ratio of 15.3. However, on a price-to-free-cash-flow basis, Visa is at 25.8 while Mastercard is at 32.6 - a substantial difference.

When putting their metrics into a discounted free cash flow model, I see Mastercard as about 16.5% undervalued - not too bad.

But doing the same for Visa stock, I get a fair value of $293/share, which represents just over 25% upside. That's enough of a margin of safety to recommend Visa as a buy right here, right now!

Given this, Visa enters the Buy List today! I believe the current stock price is an excellent entry point into this world class business. We will leave Mastercard on the Watch List, as it is still a fantastic company that any investor should love to own - it just isn't quite cheap enough to buy at this point in time.