As Long as Consumers Spend, This Stock Will Rise

As Long as Consumers Spend, This Stock Will Rise

Rising costs due to inflation are eating away at consumers. 

According to Bankrate, average credit card rates are at 18.7%, their highest level in 30 years. 

It’s no surprise financial pros are investigating credit card companies now. 

Visa (V) is the largest player in the space. And it’s financial pros’ most searched credit card company over the last month. Despite a difficult economy, Visa grew revenues 20% in the last year.

Is that all about to change?

Visa’s Business

Visa is the largest publicly traded credit card company. It facilitates payment transactions between consumers, merchants, financial institutions, and government entities across more than 200 countries and territories. 

Through Q3 2022, the company had issued 1.2 billion credit cards and 2.8 billion debit cards. 

Unlike competitors like American Express (AXP), Visa doesn’t carry consumer debt or loans. It simply processes transactions.

Visa breaks its revenues into the following categories: service, data processing, international transactions, client incentives, and other. 

More than half the company’s sales are outside the U.S., making it one of the most globally recognized names.

Financials

Despite increasing competition from fintech, V continues to grow its revenues. 

It did $24 billion in revenues in 2021, and its 12-month trailing revenues are $29 billion. While most people don’t think of Visa as a growth company, it’s nearly doubled its revenues in the last six years. 

The firm is rewarding investors along the way. Share repurchases and dividends have returned $2.9 billion of capital to shareholders.  

Moreover, Visa just raised its quarterly cash dividend by 20% to $0.45 per share and authorized a new $12 billion share repurchase program. 

V has $18.5 billion in total cash and $22.4 billion in total debt. Its 1.45x current ratio is further proof of the company’s financial strength.

Valuation

V trades at a P/E GAAP ratio of 28x, notably lower than its five-year average of 36.5x. But besides Mastercard (MA), its competitors are lower. 

For example, Discover Financial Services (DFS) has a P/E GAAP ratio of 6.4x, American Express 14.5x, and Capital One Financial (COF) 5.4x.

V trades at a price-to-sales ratio of 13x, slightly better than MA but materially higher than DFS at 2.6x, AXP at 2.2x, and COF at 1.4x. 

The combination of market dominance, growth, profitability, and dividend safety are reasons investors don’t mind paying a premium for V. 

Profitability

V is a highly profitable company. Its competitors can’t touch its net income margin of 51%. The same is true for its EBITDA margin of 70% and EBIT margin of 67%. 

Moreover, the firm is a cash cow. It generates $18.8 billion in cash from operations. Only AXP comes close at $17.6 billion. 

Its gross profit margin of 97% is lower than only MA’s 100%, which is likely an accounting aberration. 

Growth

Despite a hard year for the economy, V has grown substantially. During a recession, consumers are more likely to rely on credit cards to cover their expenses. 

V has grown revenues by 21.5% over the last year. Only M grew revenues faster. 

Our Opinion 8/10

V is in a strong financial position as it continues to stretch its lead in the credit card business. 

The firm recently increased its dividend and started a new share repurchase program. 

We’d wait for a dip in the $185 range to enter and establish a long-term position. 

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