Visa Stock Continues To Be A Spectacular Investment Choice

Well, Visa’s had a heck of a day. At the time I’m writing this, the price of Visa stock is up $20 per share (almost 9%) to $234. The cause for ebullience? Good earnings, and continued excellent prospects ahead. The company’s profitable margins continued to increase, going from 61% last year to 64% this year. Volumes are up 11%, year over year. The company is repurchasing an additional $5 billion worth of stock. Annual earnings per share growth still hovers around the 15% mark. The China State Council approved plans to open banking clearinghouses, and successful penetration of the Chinese market could prove highly lucrative to Visa shareholders.

The sharp price action today, incidentally, reveals yet another virtue of having a business ownership mindset where buy-and-hold is not only a given, but the starting premise from which all person investment decisions flow. Price gains that are the result of fundamental business improvements come in short, sharp bursts. A business growing profits at 1% per month doesn’t reflect that in smooth, 1% monthly gains. The typical large-cap American firm returns what, 10% as a historical average? If today’s Visa gains hold, the stock market actors essentially gave Visa owners a year worth of returns in a single day. That’s where trite sayings like “it’s not timing of the market, but time in the market that counts.” That’s vague enough to do us little good as investors, but it grasps at this truth—rapidly growing businesses do not deliver price gains with predictable timing (though sometimes it can be predictable that sharp price gains follow the release of great earnings reports).

It reminds me of a time this summer when Visa released its earnings and the price went down to $200. I wrote at the time that the margin of safety for those considering the stock just increased—you had a higher base rate of profits combined with a lower stock price. At the time, one reader got frustrated, saying, “Tim, if the business is so good, why’d the price of the stock go down?” That line right there encapsulated everything about someone does not treat the existence of the stock market as a convenient place to pick up ownership in a business. Equating the current price of a stock with the value of a business is a timeless human error—if Isaac Newton could lose seven thousand pounds, and cause his niece Catherine Conduitt to lose twenty-thousand pounds, on a misplaced bet on the stock of the South Sea Company stock (believing its one year price change from £100 to £980 per share was a proxy for 980% growth), we are all vulnerable to letting price fluctuations overtake rational analysis. But if you keep an eye on historical P/E ratios, err on the conservative side with growth projections, and stick with businesses you thoroughly understand, you can fight back against the possibility of reversion to emotional bias.

With Visa’s price advance today, I am more concerned about Visa’s valuation now than I have been since I’ve started writing about the company. A price of $234 is on the very high end of “okay valuation.” If the price crosses into the $260s this year, the wisdom of buying Visa starts to diminish because, in my opinion, a valuation of 30x profits would bring on a negative margin of safety (meaning, at some point, the price of the stock would permanently revert to the 20-25x profits range, so your actual returns would be less than the growth rate of the credit-card firm). If that were to happen, and depending on the extent of the overvaluation, you might be having a situation where the company might grow by 15%, but give investors annual returns of 12%.

Someone buying an overvalued Visa might still have a fair shot of beating someone in a S&P 500 Index Fund, but your safety in the event of disappointing earnings would be gone—if Visa grew at 4-6% annually for a few years, you might have to deal with moderate justified paper losses because, after all, a shift in valuation from 30x profits to 20x profits involves a 33% paper loss that would overwhelm 4-6% annual gains. The Wall Street aphorism “Priced to perfection” starts to come to mind if Visa stock sees another $20-$30 in gains this year.

Also, price increases will diminish the value of Visa’s stock repurchase program, meaning the share repurchases would have a lower positive effect on the growth in earnings per share. Yes, this is a small nitpick because Visa’s organic revenue and earnings growth has always been “the story” with this company—the buyback program is not central to Visa’s long-term returns.

All in all, Visa is a refreshing holding because it is one of the few companies out there delivering double-digit revenue growth in a way that investors can predict with high certainty ahead of time. Most companies I discuss here on the site have had a rough time growing revenues lately—and yes, there are ways around sluggish revenue growth that can make a company a successful investment. There’s something wonderful about owning a still decently valued company growing top-line revenues in the range of 12-16% annually. It’s the bedrock of forceful compounding.



Originally posted 2014-10-30 12:20:38.

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5 thoughts on “Visa Stock Continues To Be A Spectacular Investment Choice

  1. JoshuaAS says:

    Jonnydee83 I know this won’t be the answer you’re looking for, but there’s not a good straight forward answer on whether or not you should buy at a Price to Earnings ratio of 27. The answer is that it depends on what you think of the business, how long you’re planning to hold Visa, your desired margin of safety, and what you ration to be a reasonable return on your investment.

    Personally, I haven’t studied the metrics of what one can expect in terms of rate of return for a company like Visa that has a record of high growth with the variable being the Price to Earnings ratio. Therefore I am in no position to say whether or not it could be a great buy. However, I think investing in Visa even at 27 P/E could be a much more wise decision than investing in lower quality businesses trading at lower valuations. No matter what I, nor any other investor thinks, it’s your decision at the end of the day. Happy hunting JD.

  2. Adi01alerts says:

    I read some of your articles on Visa and bought Visa stock blindly without doing any kind of research on my own(I never do this) and I am really glad I did.

    Thanks Tim

  3. Seviay31 says:

    V, DFS, and MA seem to take turns being the lead pony, and any time any of them has offered any sort of meaningful sell-off, it has been a wonderful time to buy.  I own all 3, and suffice it to say my only regret is not owning more of each.  A couple weeks ago, I was hoping the market would panic-sell V down to my limit order at 190, but alas, it was not meant to be…
    Great article, as always, Tim, and I couldn’t agree more with your analysis.  I have been really trying to build up the strong, blue chip growth companies in my portfolio lately (i.e. the past couple years), whether or not they pay a meaningful dividend:  GILD, UA, V, MA, DFS, DIS, and TJX (and Apple, for now…) make up large portions of my portfolio.  Barbelling that with meaningful positions in MCD, PM, MO, BAX, KMI, and other DGI all-stars has really proven to be a nice strategy for me so far.
    I keep praying for [more] weakness in BF.B, HSY, and NSRGY so I can tuck those under my pillow…but I’ll be patient

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