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Date: March 4, 2015
Analyst Name: Brady Arnone, CJ Lee
CIF Stock Recommendation Report (Spring 2015)
Company Name and Ticker: Visa (V)
Section (A) Investment Summary
Recommendation Buy: Yes Target Price: $316.60
Stop-‐Loss Price: $234
Sector: Technology Industry: Internet Software and Services
Market Cap (in Billions): $208.7
# of Shrs. O/S (in Millions): 613.90
Current Price : 275.30 52 WK Hi: $278.65 52 WK Low: $194.84
EBO Valuation: $263.34
Morningstar (MS) Fair Value Est.: $234
MS FV Uncertainty: Medium
MS Consider Buying: $163.8
MS Consider Selling: $315.9
EPS (TTM): 8.98 EPS (FY1): 10.37 EPS (FY2): 11.99 MS Star Rating: 2-‐star
Next Fiscal Yr. End ”Year”: “Month”: September, 2015
Last Fiscal Qtr. End: Less Than 8 WK: No
If Less Than 8 WK, next Earnings Ann. Date: N/A
Analyst Consensus Recommendation: Outperform
Forward P/E: 23 Mean LT Growth: 14.07
PEG: 1.4 Beta: .8
% Inst. Ownership: 63.41%
Inst. Ownership-‐ Net Buy: -‐7
Short Interest Ratio: 4.60
Short as % of Float: 2.90%
Ratio Analysis Company Industry Sector
P/E (TTM) 30.41 20.88 25.15
P/S (TTM) 12.96 2.23 2.53
P/B (MRQ) 6.04 2.67 2.36
P/CF (TTM) 27.71 19.93 13.80
Dividend Yield .70 1.59 1.60
Total Debt/Equity (MRQ) 0.00 30.92 67.23
Net Profit Margin (TTM) 43.31 9.19 9.73
ROA (TTM) 17.24 0.00 7.55
ROE (TTM) 20.32 2.21 10.95
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Investment Thesis: In making the decision to invest in Visa, an analysis of the pros and cons is necessary to facilitate the decision-‐ making process: Pros:
• With a revved up US economy, and US and Asian stocks hitting new highs, consumer spending is going to rise as well, generating more revenue for Visa because of it’s sensitivity to the economic standing.
• Visa has teamed up with Costco in an enormous deal that has yet to be reflected in their financials.
• The analyst recommendations reflect a positive outlook for Visa with a mean rating of 1.89, with 12 analysts recommending BUY, and 17 recommending OUTPERFORM.
• Visa has consistently beat analyst estimates with no signs of variation.
• The expansion of mobile acceptance in markets.
Cons • The stock price is very close to the 52-‐
week high. • Consumer’s trust with credit cards
due to security issues across the globe. The threat of cyber attacks stealing personal information could pose a potential problem.
• The relative evaluation suggests the stock price is overvalued.
Summary Company Profile: Visa Inc.is a global payments technology company that connects consumers, businesses, financial institutions and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. Fundamental Valuation: Using the EBO valuation model, we got an implied fundamental value of $263.34/share.
Relative Valuation: We used MA,AXP,COF,DFS to compare. By using PEG multiples, our stock seems to be within 52 week low and high, but most of other multiples show we are overvalued. Revenue and Earnings Estimates: Visa revenue and earnings per share were pretty close to the consensus estimate. It was over estimate by just little percentage surprises.
Analyst Recommendations: With a mean rating of 1.89, 12 analysts recommend BUY, and 17 with OUTPERFORM.
Institutional Ownership: Institutional ownership of Visa is over 63.41%. Over 22.03% of shares from that is held by 10 institutions. Fidelity Investments has the most shares with 26,635,903. Short Interest: The average short interest is slightly above average in comparison to its competitors with an average daily volume of 3,121,680 covering in about 4.5 days. Stock Price Chart: The charts indicate that the stock is currently experiencing an upwards bullish momentum. The stock price’s continual upward trend provides investors with the confidence it will resume rising.
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Section (B) Company Profile
(B-‐1) Profile Visa Inc. (V) is an American multinational payment technology company, located in Foster City, California. The company is engaged in operating a processing network, VisaNet, which facilitates authorization, clearing and settlement of payment transactions across the world. The company provides its services to consumers, business, financial institutions and government in more than 200 countries and territories for electronic payments. Also, The company offers fraud protection for a account holders and rapid payment for merchants.
Visa Inc. operates in four major business segments. The percentage breakdown of each segments based on revenue are as follows: Service Revenues (37.56%), Data processing revenues (33.77%), International transaction revenues (23.69%), and other revenues (4.98%). Service revenue is consisting of revenues earned for providing financial institution clients with support services. Data processing revenues are consisting of revenues earned for authorization, clearing, settlement, network access and other maintenances and support services. International transaction revenue is consisting of earning from cross-‐border transaction processing and currency conversion activities.
The main competitors for Visa Inc. are MasterCard and American Express. As a leading company in this area, Visa Inc. reported total revenue increase in the 4th quarter 2014 by 7.19% while most of its competitors have experienced contraction in revenues by negative 8.94%. However, there is also a risk for Visa. The largest risk to visa is related to regulation and litigation. It might get huge impact if other counties make stick regulations covering interchange and other aspects of the payment systems.
Even though Visa has risks around its surroundings, Visa Inc. has competitive advantage over other competitors by having frameworks around the world and have firm network established throughout its operations. As long as Visa is prepared for new technology and adopt it fast, it will maintain its position as a leader.
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(B-‐2) Revenue and Earnings History
Fiscal 2013: Total Revenue: 11,778 EPS: 7.589 Fiscal 2014: Total Revenue: 12702 EPS: 8.613
1) What are your observations on revenue? Was there a notable up-‐ or down-‐trend, year-‐over-‐year? Was there seasonable pattern? Revenue has increased throughout year 2013 and 2014. There were notable drops of $28M in year 2013 Q4 quarter, and $8M in year 2014 Q3 quarter, but it bounced back up right away after that period. The trend of increasing in revenue shows positive sign for Visa.
2) Likewise, what are your observations on earnings? Earnings per share for year 2014 relatively did well compare to year 2013. In year 2014, Q1 EPS difference was 0.303, 0.596 in Q2, and 0.284 in Q3. However, Q4 EPS has dropped below previous year’s EPS by 0.126.
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(B-‐3) Most Recent Quarterly Earnings Release
1. When was the company’s most recent earning release? Their recent 2014 4th quarter report was on Jan 29.
2. In that earnings report, was reported revenue a (1) beat, (2) match, or (3) miss from consensus estimate? Beat
3. Likewise, was reported earnings a (1) beat, (2) match, or (3) miss from consensus estimate? Beat
4. What did the management attribute the beat/miss to? Due to a good holiday season and strengthening U.S. job market encouraged people to spend, and it creased their number of transaction and total volume to $1.90 trillion from $1.84 trillion.
5. Did the management provide guidance about their current quarter and their outlook
for the year? What were the key points of the guidance? Visa anticipates their hedging program to continue to mitigate this currency risk in year 2015. However they are expecting to reduce total operating revenue growth by two percentage points in year 2015. They are expecting annual diluted class A common stock earnings per share growth and annual free cash flow greater than $6 billion.
6. How did the stock react to that earnings release? Right after the earning report on January 29th, the stock price has risen from $252 to $271. After that, it has relatively stable stock price around $273.
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Section (C) Fundamental Valuation (EBO)
Include the following here:
Inputs (provide below input values used in your analysis)
EPS forecasts (FY1 & FY2): 10.37 and 11.99
Long-‐term growth rate: 14.07%
*** Indicate next to the number if you made an adjustment to the consensus LTG estimate. Justify at the bottom of this panel how you derive the adjusted value, if any *** Book value /share (along with book value and number of shares outstanding): Book value: 27,413M
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# of shares outstanding: 620.05M
Book value / share: 44.21
Dividend payout ratio: 18.79%
Next fiscal year end: 2015
Current fiscal month: 6
Target ROE: 12.17%
*** Indicate next to the number if you made an adjustment to the target ROE estimate. Justify at the bottom of this panel how you derive the adjusted value, if any *** Discount rate
Input for discount rate: 6.14% Risk-‐free rate: 7%
Beta: 0.8
Market risk premium:
Output Above normal growth period chosen: 7
*** Justify at the bottom of this panel your choice of abnormal growth period ***
EBO valuation (Implied price from the spreadsheet): $263.34
1. Comment on the fundamental value obtained in relation to the stock’s current price and its 52-‐week price range. The 52-‐week price range is 194.95 -‐ 278.29. So the implied fundamental value is within the range.
2. What might be “soft spots” of the inputs? And why? Long-‐term growth rate. Only three analysts estimate for this number. ROE 5-‐year average. ROE 5 year average is relatively close each other, but the gap between ROE(TTM) between Visa and industry is almost 10 times differences.
Sensitivity Analysis
1. Explain the input values used in sensitivity analysis. Compare the fundamental values obtained here in relation to the value from the base case
FY2 inputs. 11.99 does not include their contract with Costco in upcoming 2016. The number will definitely go up.
2. Other observations worth noting
EBO valuation would be (you can include more than one scenario in each of the following): $266.67 if changing above FY2 to 12.19. $268.33 if changing above FY2 to 12.29
The number will keep increase depends on FY2. $320.56 if changing above target ROE(industry) to visa’s
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Section (D) Relative Valuation
We chose MasterCard, American Express, Capital One, and Discover Financial Services to be our comparable. Visa is the biggest one in size wise and followings are MasterCard, American Express, Capital One, and Discover Financial Services. They are all competing each other in the financial service area.
MasterCard: An American multinational financial services corporation.
American Express: An American multinational financial services corporation
Capital One: A U.S.-‐based bank holding company specializing in credit cards, home loans, auto loans, banking and savings products.
Discover Financial Services: an American financial services company
1. Discuss various valuation multiples of your stock and its peers. Comment if any of these stocks have multiples far off from the others and explain whether it makes sense.
We found that Visa has a larger Forward P/E ratio compared to the comparable with an exception of MasterCard, which is slightly lower than Visa. For PEG ratio, Visa stands in the middle with 1.62. P/B ratio and ROE are lower than the MasterCard. Other than that, most ratios have similar orders of Visa, MasterCard, American Express, Capital One, and Discover Financial Service.
2. Discuss the various implied prices of your stock derived from peers’ (“Comparables”) multiples. Compare these implied prices to current price and 52-‐week high and low. How different are the prices derived from the various valuation metrics? Note any valuation metrics that seem to yield outlier prices and explain whether it makes sense.
Implied price we got from MasterCard by using P/E(forward) is$ 261.89 which is very close to current Visa price of $273.75, and it is located within 52 week low and high. Price from PEG is all within 52 week low and high except American Express with $305.21. Other than PEG, gaps between each stock with different multiples are pretty
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wide, it has price order of Visa, MasterCard, American Express, Capital One, and Discover Financial Services. Also, we decided to opt out the P/B multiple since MasterCard has $713.06, which is way bigger compared to others.
Section (E) Revenue and Earnings Estimates
(E-‐1)
Visa has a tendency to beat or match estimates over the years. Visa has closely followed what analysts have estimated over the last five quarters. Visa has beaten analyst’s estimates by a small margin 4/5 quarters. The only miss on sales came in the quarter ending March 2014 where they missed by $26.55 million. The same goes for EPS except Visa beat on all five of the five last quarters. The most recent quarter in the chart (quarter ending December 2014) earnings beat by $0.04 with an actual EPS of $2.53. This was not much of a surprise in comparison to the prior quarter ending September 2014 where they beat EPS by $0.08 and had a positive surprise of 3.90%. Earnings season historically has led investors to gain a positive outlook for the future quarter.
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(E-‐2)
Percentage Difference from High Estimate from Mean (Revenue)
Q1: 2.47% Q2: 3.69% FY1: 1.43% FY2: 3.42%
Percentage Difference from Low Estimate from Mean (Revenue)
Q1: 3.74% Q2: 2.43% FY1: 0.93% FY2: 3.48%
Percentage Difference from High Estimate from Mean (EPS)
Q1: 3.2% Q2: 3.45 FY1: 2.22% FY2: 2.92%
Percentage Difference from Low Estimate from Mean (EPS)
Q1: 5.49% Q2: 2.76 FY1: 2.78 FY2: 4.35%
The differences are most different for the FY1 an FY2 but not by much. All the differences seem to be similar and there are no obvious discrepancies from the revenue and EPS differences. The deviations from the revenues and EPS are small and there were only three analysts for the LT Growth Rate (%), significantly less than the revenue and EPS analysts.
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(E-‐3)
The Mean estimates of all the analysts seem to be trending down from the Sales 1 Year Ago. The trend seems to be more noticeable in the FY1 and FY2 in comparison to the recent quarters. In EPS, it appears to be trending marginally down when comparing the Mean to the EPS 1 Year Ago. This trend seems to be constant across both Quarter Endings and FY1 and FY2.
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(E-‐4)
All analysts who made estimates revisions moved them up. One analyst moved their estimate revenue estimate up this last week along with five other analysts who moved their estimate up within the last four weeks. One analyst moved their earnings estimate up this last week and an additional three analysts moved their estimates up within the last four weeks. All analysts who revised their estimates upgraded which is convincing to investors because the analysts have positive outlooks.
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(E-‐5)
Revision Date
Revision Type
Revision Up/Down
Current
Previous
% Change
# of Analysts Reporting
Feb 11, 2015 Up 9/21 2.50 2.49 0.04 35
1) Make note of the company’s (1) last earnings reporting date, and (2) next earnings
reporting date. Visa’s last earnings report was on January 29, 2015 where they released the Q1 report. The next earnings report for Q2 will be released on April 29, 2015.
2) Review revisions day by day, and comment on (1) whether they tend to be clustered, and
(2) if clustered, were they near earnings reporting date? There was only one revision made to analysts’ estimates and it was two weeks after Visa released their Q1 earnings report.
3) Were there any greater than 10% consensus revisions? What is the maximum % consensus revision?
The only revision was a 0.04% upgrade in the estimate
4) Observe stock price chart, how did the stock trade around dates of greater than 10%
consensus revisions? The stock never was revised greater than 10%
5) Other observations worth noting? The outlook going into earnings was positive for Visa and they exceeded expectations by reporting actual earning per share of $2.53 vs. analysts estimates of $2.49.
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Section (F) Analysts’ Recommendations
(F-‐1)
1) Review the trend of analyst recommendations over the last three months. Is there a notable change of analyst opinions, turning more bullish or bearish?
Over the past three months there has been no notable change of analyst opinions. One analyst changed from BUY to OUTPERFORM out of the 37 analysts so the opinions on Visa have remained constant.
2) How many different ratings out of the five possible ones did the company receive currently, one, two, and three months ago?
Currently, 12 analysts say BUY, 17 analysts say OUTPERFORM, and 8 analysts say HOLD. One analyst changed their opinion one month ago but remained unchanged the two previous months.
3) Is there a notable trend of opinion convergence or divergence? There has been no notable trend of opinion except for that all the opinions have remained perpetually the same.
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4) Cross-‐check (1) Morningstar analyst’s research report; and (2) media or other analysts’ comments from online financial sites. Is what you see here consistent to comments elsewhere?
In comparison with Morningstar’s eight analysts, 6 Morningstar analysts say BUY, 1 says HOLD, and 1 says UNDERPERFORM. This is much different then Reuter’s 36 analysts opinions because no Reuter’s analyst said UNDERPERFORM. In accordance with CNBC, 10 of their analysts say Strong Buy, 16 say Buy, and 8 say Hold. CNBC’s analyst opinions are much more closely related to Reuter’s. There is some inconsistency in analyst opinions but majority of analysts reflect that of Reuter’s.
5) Other observations worth noting? CNBC’s scale is worth noting because it varies from Reuter’s and Morningstar’s. CNBC’s scale uses a Strong Buy, Buy, Hold, S, and U, which is different from other scales used, by other media sites.
(F-‐2) Most Recent One-‐Month Analysts Upgrades/Downgrades from CNBC There were no recent analysts upgrades or downgrades from CNBC
1) Make note of the company’s (1) last earnings reporting date, and (2) next earnings reporting date.
Visa’s last earnings report was their Q1 on January 29, 2015. Their next earnings report will be on April 29, 2015 for the current quarter.
2) Add up the number of upgrades on weekly basis. Do the same for downgrades. Were there more up-‐ or down-‐grades? Were there any consistent trend you observe in the recent month? Were there any up-‐ or down-‐grades of more than “one grade”?
There were not any upgrades or downgrades for Visa.
3) Were there clustering of up-‐ or down-‐grades? If so, were they clustered around earnings report date?
There were not any upgrades or downgrades so they were not clustered around earnings.
4) Observe stock price chart, how did the stock trade around dates of up-‐ or down-‐grades? There were not any upgrades or downgrades so they did not affect the stock price.
5) Other observations worth noting? There were no changes so there was no impact on the stock price or earnings.
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Section (G) Institutional Ownership
V
Section 1
Ownership Activity # of Holders % Beg. Holders Shares %
Shares
Shares Outstanding 490,971,874 100.00%
# of Holders; Total Shares Held/% Shares
1,662 107.50% 461,415,367 93.98%
# New Positions 175 11.32%
# Closed Positions 59 3.82%
# Increased Positions 647 41.85%
# Decreased Positions 654 42.30%
Beg. Total Inst. Positions 1,546 100.00% 456,194,673 92.92%
# Net Buyers; 3 Mo. Net Chg -‐7 49.73% 5,220,694 1.06%
Section 2 Ownership Information %
Outstanding
% Institutional Ownership 63.41
Top 10 Institutions % Ownership 22.03%
Mutual Fund % Ownership 31.96%
Section 3
> 5% Ownership
Holder Name % Outstanding Report Date
No Institutions hold greater than 4%
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Combine information provided in all three sections to discuss:
1) Whether institutions, on net basis, have been increasing or decreasing ownership and whether the change can be considered as substantial
The number of net buyers has been decreasing of recently. The three month net change was -‐7 which concludes that there has been slightly more decreased positions than increased positions. The change is not substantial because it is in a fairly neutral state sitting at -‐7.
2) Whether the stock has sizable institution interests/support Institutional investors own over 63% of Visa, which is an indication that institutions see value in investing Visa. As mentioned in the Report Guidelines, an increase in institutional ownership could act as a directional indicator of stock price in the future and Visa’s ownership exemplifies a positive outlook.
3) The extent of the (> 5%) owners by adding up all >5% ownership, and make an effort to
identify those that are mutual funds All the mutual funds that incorporate Visa hold only small amounts. Vanguard Total Stock Mkt Idx has the largest outstanding share at 1.12% followed by Fidelity Contrafund Fund at 0.97%. The remaining mutual funds that hold Visa all have ownership of less than 0.75%. Several mutual funds have small amounts of ownership in Visa.
4) Other observations worth noting? No institutional investors own over 4% of the outstanding shares. Instead, more institutions own smaller percentages rather than just a few large investors. The shares are spread out amongst multiple institutional investors.
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Section (H) Short Interest (Guidelines for H-‐2 Have Been Updated)
(H-‐1) Short Interest Data from http://www.nasdaq.com/ (NASDAQ’s website)
VIsa
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MasterCard
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American Express
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(H-‐2) Short Interest Data From http://finance.yahoo.com/
Visa
Avg Vol Avg Vol Shares Float (3 month) (10 day) Outstanding
2,560,400 2,300,460 628.26M 504.41M
Shares Short Short Ratio Short % of Float Shares Short (Include as of date) (Include as of date) (Include as of date) (Prior Month)
14.06M (Feb 13, 2015)
4.60 (Feb 13, 2015)
2.90% (Feb 13, 2015) 14.59M
MasterCard
Avg Vol Avg Vol Shares Float (3 month) (10 day) Outstanding
5,006,460 5,049,700 1.15B 1.15B
Shares Short Short Ratio Short % of Float Shares Short (Include as of date) (Include as of date) (Include as of date) (Prior Month)
13.17M (Feb 13, 2015)
2.30 (Feb 13, 2015)
1.30% (Feb 13, 2015) 11.76M
American Express
Avg Vol Avg Vol Shares Float (3 month) (10 day) Outstanding
6,939,650 7,882,260 1.02B 864.18M
Shares Short Short Ratio Short % of Float Shares Short (Include as of date) (Include as of date) (Include as of date) (Prior Month)
8.62M (Feb 13, 2015)
1.00 (Feb 13, 2015)
1.00% (Feb 13, 2015) 8.13M
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1) Make note of the company’s (1) last earnings reporting date, and (2) next earnings
reporting date. Visa reported Q1 earnings on January 29, 2015 and will report Q2 earnings on April 29, 2015.
2) Discuss market sentiment on the stock based on the short interest statistics, recent trend reported in in (H-‐1) and (H-‐2)? Has the sentiment turned more bullish or bearish over the last year? How about in more recent month and why?
When you take a look at Visa’s short interest ratio in comparison to its competitors, MasterCard and American Express, the higher ratio indicates a bearish outlook. More investors are shorting Visa and it is reflecting a high short ratio because Visa has a considerably lower amount of shares outstanding.
3) From (H-‐1), observe “short interest” and “# of days to cover” values for two reporting dates immediately before and one reporting date immediately after earnings report. (1) Were there notable increase or decrease in the values, right before or right after earnings report? (2) Observe stock price chart and comment on how stock traded around those dates.
The “short interest” and “# of days to cover” values for the date immediately before and after earnings was reported illustrates a decrease in short interest of about 350,000 and a decrease in # of days to recover by 1.14 days. Not a huge change, but it does show that after earnings there was a more bullish attitude towards Visa.
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Section (I) Stock Charts (Guidelines for I-‐4 Have Been Updated)
For (I-‐1) – (I-‐3), the stock price charts should include (1) your stock, (2) 1 competitor, (3) sector ETF, and (4) SP500
(I-‐1) A three months price chart
(I-‐2) A one-‐year price chart
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(I-‐3) A five-‐year price chart
1) (I-‐1) – (I-‐3) Discuss what you observe from the above stock price charts. This should
include comparing your stock to competitors, sector, and SP500 over the three different time horizons.
In all time horizons, Visa, MasterCard, the technology sector, and the SP500 are followed similar courses. MasterCard and Visa both had more volatile ups and downs in comparison to the technology sector and SP500. This is represented in the five-‐year chart at the beginning of 2014 where both Visa and MasterCard took positive jumps while the sector and SP500 continued a gradual rise in stock price. In the three-‐month graph it appears that Visa and MasterCard took a significant hit while the sector and index were not hit as hard. The SP500 and tech sector move at a much more conservative rate with less volatility while Visa and MasterCard are more volatile and move up and down quicker. Visa and MasterCard are both at the highest prices they have been in five years and show no signs of slowing down anytime soon if consumer spending is still increasing.
2) Other observations worth noting? (I-‐4) Technical Indicators (“Moving Average” and “Relative Strength Index” from https://www.google.com/finance?tab=we
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Short-‐term moving average and relative strength index indicators
Long-‐term moving average and relative strength index indicators
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1) Discuss your findings from these sets of technical indicators. Compare your findings here to findings from fundamental analysis. Are findings from technical analysis supportive of your other findings?
The Simple Moving Average (SMA) charts represent the momentum and objectivity that Visa has been experiencing over the years. In both the long and short term the Simple Moving Averages have an upward slope that illustrates the rise in stock price. Visa has continually been above the SMA’s in the long term making investor confident the upward trend will continue. In the short term, there is more volatility but the stock price repeatedly crosses above the SMA and is currently above both the 10-‐day and 50-‐day moving averages.
2) Other observations worth noting?
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Works Cited Morningstar www.finance.yahoo.com www.cnbc.com www.reuters.com www.money.msn.com
