Visa Inc (Part 2) - consistent growth all around
Company deep dive, financial analysis, earnings forecasts and stock valuation on Visa Inc. (V)
This is Part 2 of a company deep dive for Visa Inc V 0.00%↑ . To read Part 1, click on this link.
Balance Sheet and Cash Flow Analysis
Growing dividend payments
Subject to legally available funds, Visa expect to continue paying quarterly cash dividends on its outstanding common and preferred stock in the future. However, the declaration and payment of future dividends are at the sole discretion of its board of directors after taking into account various factors, including financial condition, settlement indemnifications, operating results, available cash and current and anticipated cash needs. Over the past three years, Visa has been paying out an average of 21.9% of dividends from its earnings. With steady growth in earnings, the dividend payment levels should follow suit.
Improvement in cash balance to total borrowings
The amount of cash balance surpassed the total borrowings for the first time in FY23 on the back of better cash management and paying off all short-term debts.
Stable short-term liquidity
Despite improvement in cash balances, the short-term liquidity has been stable at 1.45x of current assets over current liabilities. Higher cash balance in current assets were offset by higher client incentives and accrued liabilities in current liabilities.
Improving long-term solvency
Furthermore, the Visa’s long-term solvency seems to be improving to net cash position as of FY23 from a net gearing of 7.0% in FY22. I believe this was due to a higher free cash flow and a healthier balance sheet.
Stable Free Cash Flow Margin
As we can see below, Visa’s free cash flow margin seems to be stable being above the 60% level over the past three years. Even then, we saw a slight decline to 60.3% in FY23 from 61.0% in FY22 (-0.7%-pts YoY). This could be due to lower FCF in FY23 after utilising USD1.1bn in CAPEX for future growth investments (vs USD970mn of CAPEX in FY22).
Financial Outlook
Revenue projected CAGR at +7.4% for FY23-26E
According to consensus, Visa topline growth is projected to grow between 9.8-11.0% for FY24-26E. In the same period, I am forecasting 10.0% steady annual growth for FY24-26E in my financial model. Sales growth is projected to be driven by higher consumer consumption and increasing market share in existing markets through acquisitions of local fintech companies. Note that management guided the revenue is projected to grow in low double-digit in FY24.
Stable operating margin
Management guided that the operating expense is expected to grow in the low double-digit range for FY24. Considering that this is in the similar growth rate as net revenues, most likely that the operating margins will be relatively flat moving forward. Hence I project the operating margin to stay consistent at 64%.
Net profit estimated CAGR at +7.4% for FY23-26E
According to consensus, Visa bottom line growth is projected to grow between 10.4-14.7% for FY24-26E. In the same period, I am forecasting a stable annual net profit growth of 10% for FY24-26E in my financial model. This is attributable to sustainable operating margin with the growing sales. Management guided the diluted class A common stock EPS growth is expected to be in the low-teens for FY24.
Company Valuations
Historical PE Peers comparison
According to Simply Wall Street, Visa is currently trading at 32.3x historical PE which is slightly above its peers’ average PE of 29.3x. This seems to be fair when looking at the valuation of other financial payments players.
Company PE ratio vs its peers'
Short-term valuation
On the other hand, if we look at Visa’s historical five-year forward PE, it is currently trading at 30.1x which is along the line of its five-year historical forward mean PE. This seems to be fairly valued. Even then, the share price was trading along the +1SD above its five-year forward mean PE between 2019-2021. So there could be some room to growt further in the near-term.
Discounted cash flow valuation for the next 1 year
On a discounted cash flow basis, the valuation seems even more attractive. The 1-year forward TP for common stock A is USD333.62/share which is +17.6% in potential capital upside. This is assuming a CAPM of 14.7% and WACC of 9.7%.
Medium-term valuation
Below are the forecasted target prices (TP) based on my own FY24-26E based earnings pegged to various PEs. I used between 20-40x PEs to ascertain the potential TP range for Visa in the medium-term. The TPs are then compared to the recent Visa share price of USD283.61/share as of 22 Feb 2024.
Looking at the above, I believe there is some gains to be made from FY24-26E. Any immediate correction below the USD230/share levels is a good opportunity to accumulate.
My investment plan
I currently hold some shares in Visa at the average buy price of USD276.31/share. Honestly, we may see some pullback in the near term if there are any unfavourable economic news by the market.
However, my plan for this stock is to hold for the medium term as long as its financial results continue to deliver. If the company delivers above-estimated results, the valuation will become even more attractive.
What do you think of Visa’s valuation?
Would you price it differently?
Share your thoughts in the comments section 👇🏻😊
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