Stock of the week - Visa (31.08.2023)

• Visa reached 2-year highs yesterday
• WSJ hints at looming increase in interchange fees
• Impact of fee hike may be negligent
• Stock mimics performance of S&P 500 index
• A look at the valuation
• Stock trades less than 3% below ATH

Visa (V.US), the US financial services company, climbed to a fresh 2-year high above $245.00 this week, following the release of a report from Wall Street Journal. Stock has been slightly outperforming S&P 500 index this year, gaining around 18.5% YTD compared to a 17.6% YTD gain on the index. Let's take a look at the company, recent news surrounding it as well as its valuation.

Wall Street Journal report on interchange fees

Visa, as well as other US payments companies, gained on Wednesday following the release of a Wall Street Journal report. WSJ reported that Visa as well as Mastercard are planning to increase fees charged on merchants using their networks. Details in the WSJ report were scarce but Bloomberg reported later on that Visa will begin with hiking fees for online transactions in October 2023, followed by a hike to fees charged on transactions with commercial credit, debit and prepaid cards in April 2024.

However, while a boost to fees charged on transactions is a positive for Visa, its impact on the company's financials may be negligent. According to CMSPI, combined fees paid by merchants may increase by over $500 million following fee hikes. While this figure may look large at first glance, it should be said that those fees amounted to $160.7 billion in 2022. On top of that, it should be said that this 'over $500 million' will not go only to Visa but will be split among all players in the field. Last but not least, a large part of those interchange fees is kept by banks issuing cards rather than payments companies therefore impact on Visa's financials may be minimal.

Mimicking S&P 500 performance

Visa, as well as other payments companies, are to a huge extent a beta-neutral stock market, meaning that their share price moves are closely following moves of the broader market. This should not come as a surprise given that growth prospects for companies with core business like Visa are capped. This is because increasing market share in a competitive business like payments is hard and growth in payments volume to a large extent follows inflation dynamics. 

A chart below shows year-to-date performance of Visa and its key competitors - Mastercard and American Express - as well as S&P 500 index. As one can see 3 payments companies and the broad market index were moving mostly in tandem since the beginning of the year. Visa has slightly outpaced S&P 500 with an around-18.5% gain while the index gained 17.6% YTD.

Visa and its major peers have been largely mimicking performance of the S&P 500 index so far this year. Source: Bloomberg Finance LP, XTB

A look at DCF valuation

Visa finished Wednesday's trading at $246.23 - or around 18.5% year-to-date higher. However, the fact that the company has been trading similar to S&P 500 tells us nothing about its valuation. Running a simplified discounted cash flow analysis of the company gives us some more clarity. We have used averages for the past 5-years for revenue growth, operating income, effective tax rate and weighted average cost of capital (WACC) estimates. Capital Expenditures, changes in working capital as well as depreciation were expressed as share of revenue and 5-year averages were later also calculated. Terminal revenue growth rate of 4% was assumed.

DCF model with the above assumptions resulted in a valuation of $237.2 per share of Visa, or 3.7% below yesterday's closing price. However, it should be noted that DCF models are highly sensitive to the assumptions. Two sensitivity matrices are provided below - one showing sensitivity of valuation to changes in terminal WACC and terminal revenue growth rate assumptions while the second one shows sensitivity to changes in revenue growth and operating margin assumptions. As one can see below, should Visa achieve revenue growth and operating margin that are one percentage point lower than average for the past 5 years, DCF valuation would drop to $211.7 per share - or 14% below current market price!

Source: XTB Research

Source: XTB Research

A look at stock multiples

We can also take a look at how Visa's shares are priced to its major competitors - Mastercard, American Express, PayPal Holdings and Discover Financial Services. Taking a look at six of the most common stock multiples - P/E, P/BV, P/S, P/FCF, EV/Sales and EV/EBITDA - we can see that results are inconclusive and differ significantly between used measures. While Visa looks 'cheap' as far as Price-to-Book and EV/Sales multiples are concerned, the company is rather 'expensive' when other multiples are concerned. Multiplying per share data for Visa and mean multiples for the peer group leads us to a valuation and as one can see, the range of those valuations is enormous - from $95.20 when P/S is concerned to $402.70 when P/BV is used.

Source: Bloomberg Finance LP, XTB Research

A look at the chart

As we have already said in an opening paragraph, the share price of Visa (V.US) climbed to a fresh 2-year high yesterday, in response to the release of the WSJ piece on merchant fees. Stock painted a daily high above $248 per share but bulls failed to hold onto those gains. As a result, shares erased most of the gains and finished yesterday's trading just 0.3% higher.

Nevertheless, technical setup on the chart looks quite promising. Stock has recently broke above the upper limit of a short-term $235.00-244.50 trading range and should the range of an upside breakout be executed in a textbook manner, share price may jump to as high as $255.00, which would be above current record highs ($252.50).

Source: xStation5