Credit Where Credit is Due
Why we Like Visa…
Visa is the world’s largest retail electronic payments network, earning a small fee from more than 70bn annual transactions on more than 3.2bn issued cards. Visa is not a bank; it doesn’t lend or take on credit risk. The business is globally diverse, and has a roughly two-thirds market share, based on purchase volume outside the closed market of China. The acquisition of Visa Europe has increased the group’s global reach and provides sizeable revenue and cost synergies. Consumers will also benefit from enhanced network capabilities and additional levels of cybersecurity.
The Visa franchise is attractive, with a well-recognised and trusted brand, and strong pricing power. Barriers to entry are high, driven by the clear value proposition for consumers, broad merchant acceptance, and access to financing and banking relationships. The group is well placed to leverage its large network (VisaNet) to continue its long-term track record of growth. From a base of 3.2bn cards and 44m merchant locations, the group is aiming to expand 10-fold to 30bn ‘ways to pay’ and 400m ‘ways to be paid’. The strategic focus is on growing the market rather than battling for share in the current market, and, in that regard, management have outlined three areas of potential growth.
Firstly, the ongoing shift from cash and cheques – the use of which still amounts to $17 trillion, growing at 2% p.a. – to electronic means of payment. Visa is working with a huge network of partners to increase the number of cards/products in circulation.
Secondly, the growth of online retailing and mobile payment systems, which remove the need for cash altogether. Digital commerce is expected to grow five times faster than physical commerce, with Visa standing to benefit given its share in online retail is more than double its share in physical retail. Crucially, for every dollar spent on digital transactions, 43c is charged on a Visa card, compared to 15c for physical transactions. In the rapidly changing world of digital payments, the group has sought to enter into partnerships with innovative new players to further embed Visa cards into the payment stream, and is well placed to meet the consumer demand for increased security and fraud protection.
Thirdly, expansion in new segments with a $30tn addressable market, which are not just focused on the point of sale, but on a wider range of payments. These include the ‘Internet of Things’, connected devices, and the commercial market, including peer-to-peer, government to consumer, and business to business transactions.
We believe Visa offers predictable and defensive growth. Against a background of subdued global economic growth, the company is currently generating annual earnings growth of around 20%. Low capital intensity, a strong franchise, and recurring revenues all contribute to high operating margins in the mid-60s, strong free cash flow, and high return of capital employed. The group has a strong balance sheet and a prudent strategy of capital allocation, providing the financial flexibility to reinvest in the business, pay a progressive dividend, and repurchase stock. All in all, we believe the current mid 20s PE rating of the shares is fully justified and doesn’t give the group credit for an attractive long-term outlook.