VISA

[Guest Dazel]

 

I do not have a ton of time to go into detail but I will start to explain what we see in Visa.

 

VISA.

we bought it during the crash and as always sold it too early. So we knew what was going on this time around when FIN REG...knocked it from 100 to 70.

They have a moat...Mastercard is half their size and the other competitors are tiny.

Their moat is global in the high growth areas where cash is being substituted for cards...which include debit and prepaid. They also are affiliated with governments all over the world who issue cards to social sevices...the cards are simply reloaded instead of getting checks in the mail. This brings down government expeditures and will continue.

 

Common mistakes about the company.

-They are a transactional company they get fees per use...the more use the more fees

-they have 0 credit exposure

-Checks (cheques) and cash are more expensive for all users...the trend is in their favor and continuing globally

-they are not allowed in China yet. (why)...they have the best information system on the planet for tracking people and the economy

-they have very little exposure to Europe because the european banking system still owns VISA Europe (they have an agreement for transactions there and there is a PUT agreement where Visa may have to buy VISA europe if they want to sell it..

 

Business

Their cashflow is above their earnings because they have very low capex and they depreciate mostly technology expeditures.

 

2011 PE estimate of 15 (we think it will be lower) would put Visa at forward cashflow per share at around 12. We think that is conservative and cheap for the company. WHY.

 

-Visa is becoming effiecient as a stand alone company. When it was owned by the banking system the incentives for profits were not the same.

 

-technology costs are deflationary and other than marketing it is their largest expense...costs will drop...who else has this scenario with pricing power?

 

-Visa was sold out by the banks in March 2008...remember those times? It was sold because the banks needed to raise capital...same with Mastercard which has similar chracteristics

 

-Visa came public during the worst economic times the U.S has seen in 70 years...their volumes were down  big in 2009...so the public comparable numbers people are looking at do not reflect what the company is capable of

 

- the rest of the world is growing quickly and will eventually surpass North America

 

-old numbers reflect the litigation settlement the company had with AMEX, Discover and others..

 

-They have 0 debt and margins above 50%

 

-They do not need to invest their cash returns ( anywhere so buy back are the norm and dividends will likely  head up and they will buy up smaller competitors with cash. (they just bought Cybersource)

 

-The stated ROE is low because of the large goodwill on the balance sheet this is not reflective of the real cash return.

 

I will add more as poeple join in.

 

Dazel.

 

 

 

[ExpectedValue]

So is there a reason why you think Visa is the better buy than Mastercard? Is it a quality thing: buy the best vs buy the cheapest?

[DCG]

I first bought a pretty large position Visa during their IPO. Ended up selling for a loss during the crash (got stopped out on it - in hindsight, one of the biggest investing mistakes I've ever made). It went lower than when I sold it, but I ended up buying it back (a smaller position than I originally had) a good amount higher than what I paid during the IPO. I've added to my position a couple times over the last few months.

 

I'd like to see them improve their ROE, but I'm otherwise very happy with the company's management, and I think it's future potential is still great. Much of the world is still on cash and not credit or debit yet, so tons of room for international growth.

 

The long-term risk is competition from companies like Paypal (more than other credit card processors, IMO), and an increase in the ability for direct bank-to-bank transfers that could bypas the CC processors. For example, being able to pay through your smart phone and having money transferred from your bank (the credit card companies could still potentially be involved in those transactions though).

 

 

 

[turar]

The long-term risk is competition from companies like Paypal (more than other credit card processors, IMO), and an increase in the ability for direct bank-to-bank transfers that could bypas the CC processors. For example, being able to pay through your smart phone and having money transferred from your bank (the credit card companies could still potentially be involved in those transactions though).

NPR's Marketplace program had a good story on that recently. http://marketplace.publicradio.org/display/web/2010/07/08/pm-mobile-pay-changes-the-way-we-do-biz/

[rmitz]

The long-term risk is competition from companies like Paypal (more than other credit card processors, IMO), and an increase in the ability for direct bank-to-bank transfers that could bypas the CC processors. For example, being able to pay through your smart phone and having money transferred from your bank (the credit card companies could still potentially be involved in those transactions though).

 

I think there's another risk in the regulation of fees (or competition in general) resulting in lower fees and lower margins over time.  That very benefit of cheaper technology doesn't just apply to Visa, it applies to everyone.

[Guest Dazel]

 

WE have heard those arguments as they are very public...I am comfortable giving up a percentage here and there for market share...we think the smaller players you are alluding to are take over targets...more there..sometime later... we have looked at Pay pal which is the best part of Ebay.

 

Global Scale wins....(which is why we prefer them over MA for now)  they have the global name,security, banking partnerships, government partnerships...these are worth a tremendous amount of goodwill and to think someone can challenge their position is questionable...for years..The growth is international but the North America is a cash cow.

 

My concern is that they would try to break up their oligopoly but your points on competition and the fact they are in the marketplace "pardon the pun" help. There has not been any sort of anti trust talk as far as I have seen.

valuation is your key...we see growth...but we shall see.

 

Dazel

 

 

[Myth465]

Honestly this is one of the few companies that I have come across that actually has a moat. Much stronger than EBay, Google, Apple, or MSFT. Only the Government and a monopoly breakup can take them down.

 

The only other fear is a change in how transaction fees are charged. Right now they greatly exceed their cost, and Walmart and other retailers may push to have this corrected legally. This idea really peaked my interest, my only concern is costs. I see them generating $4 billion in cash (annualizing Q1) at $63 billion it seems a bit pricey. Granted it should probably trade for 20x CF given its growth prospects and monopoly / duopoly.

[biaggio]

Dazel thanks for sharing your idea.

 

I would love to own such a co.

 

I am still stuck on the price. To me it looks fairly valued to a bit expensive.

 

For the sake of my education I reviewed visa's  latest 10K and 10Q:

 

I get approx owners earnings of ~$3 if you take 2009 year end. Upon looking at recent 10 Q I noticed they have had good growth and had owner's earnings of ~ $2 for last 6  reported months (would it be fair to extrapulate "FCF" of $4 per share). At current price V would be fairly valued if it grew 15% per year for the next 10 years if you use 2009 FCF of $3 and would be fairly valued if it were to grow at 13% x 10 years using $4 per share.

 

I am using a discount rate of 10%

 

I feel that  V could grow at 15%/years 10 years or more, especially with inflation. It just does not see that there is a margin of safety at current price.

 

Then again I know it is better to buy a great company at a fair price(I think this is what Visa is), than a fair company at a great price...I am just such a cheapskate that I would like to have more of a discount.

 

Thanks again

[beerbaron]

No matter how I look at Visa all I see is an expensive fully valued company. I'm way too cheap for this, I like to buy Fisher at Dodd's prices.

 

E-Bay sounds like a much better buy with a PE of 10 and Paypal as a kicker. If only E-Bay's management could start allocating their capital sensitively...

 

BeerBaron

[Myth465]

No matter how I look at Visa all I see is an expensive fully valued company. I'm way too cheap for this, I like to buy Fisher at Dodd's prices.

 

E-Bay sounds like a much better buy with a PE of 10 and Paypal as a kicker. If only E-Bay's management could start allocating their capital sensitively...

 

BeerBaron

 

Baron do you think the Amazon creep into EBay's market thesis is overblown?

[beerbaron]

No matter how I look at Visa all I see is an expensive fully valued company. I'm way too cheap for this, I like to buy Fisher at Dodd's prices.

 

E-Bay sounds like a much better buy with a PE of 10 and Paypal as a kicker. If only E-Bay's management could start allocating their capital sensitively...

 

BeerBaron

 

Baron do you think the Amazon creep into EBay's market thesis is overblown?

 

Well, when I first started thinking about eBay I did thing they had a very solid moat for the web. But the more I tough about it and the more it seemed like eBay has diverged from a pure auctioneer to an online merchants host. The lines are getting blurry now, I took some time to look at their new Ebay IPhone apps and it looked like the focus was taken off their auction and more toward the selling part of the business. Not a smart move in my opinion, they are getting toward the broad market instead of staying in their very lucrative niche. There is a real danger that they will lose focus and open door for competition. I don't see Amazon going into the auction business but they don't need to, eBay is diluting it's own moat by itself.

 

On the Paypal side, the business seems nice. Especially with EBay as a showroom. China/India to more likely to use EBay before Amazon, those are cultures that are more used to person to person trading then institutionalized trading like Amazon. So if China start using eBay first, then Paypal gets visibility and defacto becomes a leader. the question is... is eBay going to penetrate the chinese market? Payments is a business where the leader gets more business because he is the leader.

 

On the capital allocation side I was not impressed take a look at: http://en.wikipedia.org/wiki/List_of_acquisitions_by_eBay . The fact that they paid 1.2B for BillMeLater, 2.6B for Skype and god knows for that RedLaser app. Come on a bar-code reader that will tell you the price of the item as well as all the other prices in your area... there is such a easy workaround for the merchant, they will get their own SKUs instead of using the generic ones.

 

To resume my thesis, I love the eBay/Paypal combination they are complementary and should be making a lot of money. I hate what they did with their money and their lack on focus on their core strengths. Hopefully the new CEO will, but so far it left me no clue to believe so.

 

Still, I'd rather own eBay then Visa, you get Paypal for free and you have a descent valuation.

 

BeerBaron

[abyli]

In China, ebay does not have a chance to win. Taobao.com is dominant in China and with Alipay in China, I do not see paypal has a chance to win either. Both Taobao.com and Alipay are owned by Alibaba Group. eBay retreated from China market a few years ago. Yahoo made a smart move, Yahoo gave Yahoo China to Alibaba Group + $1Billion, in return Yahoo now owns 40% of Alibaba Group.

 

No matter how I look at Visa all I see is an expensive fully valued company. I'm way too cheap for this, I like to buy Fisher at Dodd's prices.

 

E-Bay sounds like a much better buy with a PE of 10 and Paypal as a kicker. If only E-Bay's management could start allocating their capital sensitively...

 

BeerBaron

 

Baron do you think the Amazon creep into EBay's market thesis is overblown?

 

Well, when I first started thinking about eBay I did thing they had a very solid moat for the web. But the more I tough about it and the more it seemed like eBay has diverged from a pure auctioneer to an online merchants host. The lines are getting blurry now, I took some time to look at their new Ebay IPhone apps and it looked like the focus was taken off their auction and more toward the selling part of the business. Not a smart move in my opinion, they are getting toward the broad market instead of staying in their very lucrative niche. There is a real danger that they will lose focus and open door for competition. I don't see Amazon going into the auction business but they don't need to, eBay is diluting it's own moat by itself.

 

On the Paypal side, the business seems nice. Especially with EBay as a showroom. China/India to more likely to use EBay before Amazon, those are cultures that are more used to person to person trading then institutionalized trading like Amazon. So if China start using eBay first, then Paypal gets visibility and defacto becomes a leader. the question is... is eBay going to penetrate the chinese market? Payments is a business where the leader gets more business because he is the leader.

 

On the capital allocation side I was not impressed take a look at: http://en.wikipedia.org/wiki/List_of_acquisitions_by_eBay . The fact that they paid 1.2B for BillMeLater, 2.6B for Skype and god knows for that RedLaser app. Come on a bar-code reader that will tell you the price of the item as well as all the other prices in your area... there is such a easy workaround for the merchant, they will get their own SKUs instead of using the generic ones.

 

To resume my thesis, I love the eBay/Paypal combination they are complementary and should be making a lot of money. I hate what they did with their money and their lack on focus on their core strengths. Hopefully the new CEO will, but so far it left me no clue to believe so.

 

Still, I'd rather own eBay then Visa, you get Paypal for free and you have a descent valuation.

 

BeerBaron

 

 

[Guest Dazel]

 

We agree with everyone that Ben Graham would laugh at the valuation....I think that using the 2009 numbers  for a base is a mistake. That is where the valuation gap is...use 2010 numbers and add in 20% growth a year and you will see different numbers...back out the $5 billion in cash as well...other options are to go on a buying spree with debt as they currently have 0 debt. That is a big difference in looking at their total market capitalization compared to say american express.

 

AMEX market cap is approx $50 billion and debt is $72 billion ($52 billion net of cash)

 

So how is Visa expensive when compared to American Express?

 

$58 billion total market capitalization (net of cash)Visa

$102 billlion at American express

 

SCALE

Driving Global Commerce

 

Visa has built one of the world’s most advanced processing networks, capable of handling more than 10,000 transactions per second reliably, conveniently and securely. In the four quarters ended March 31, 2010, our global network processed:

 

  •  64 billion total transactions3

  •  $4.6 trillion total volume3

  •  $2.9 trillion payments volume

 

and growing......

 

Dazel.

[beerbaron]

In China, ebay does not have a chance to win. Taobao.com is dominant in China and with Alipay in China, I do not see paypal has a chance to win either. Both Taobao.com and Alipay are owned by Alibaba Group. eBay retreated from China market a few years ago. Yahoo made a smart move, Yahoo gave Yahoo China to Alibaba Group + $1Billion, in return Yahoo now owns 40% of Alibaba Group.

 

Thanks for the info, I stopped my research on eBay after I understood how bad at investing they are.

 

BeerBaron

[txlaw]

Dazel, Visa is an interesting company that several sophisticated hedge funds -- the Tiger Cubs, in particular -- love to own.

 

But I'm pretty wary about the company for the following reasons.

 

First, the regulatory risk dissuades me from investing in MA or VISA given the price at which these companies are trading.  The consumer payment system is essentially a bundled payment system where transactional credit and revolving credit have been joined at the hip for a while now.  It is the perfect example of a public utility that has been controlled by an oligopoly to the detriment of society, in my opinion.  In fact, the Boston Fed just recently released a paper arguing that the bundled system is a regressive tax, as the cost of goods is higher on account of interchange fees (see http://www.economist.com/blogs/democracyinamerica/2010/07/interchange_fees). 

 

People are finally beginning to understand this, and the recent interchange fee reform could be the first steps towards wholesale reform of the industry, which could lead to substantially reduced revenue for the incumbents and entrance into the market by lower cost competitors.  I haven't read the interchange reform bill, but one definitely needs to look at that to see whether it was a defeat or victory for the industry (could be a victory in that it is less effective than it could otherwise have been).  Ideally, every payment systems transaction would show the cost upfront by requiring merchants to add the cost of a debit or credit card transaction to the price paid for goods and services.  I know the bill has not gone that far, and I doubt we'll ever see anything like that.

 

Also, the banks are not going to want to take a big a hit on interchange fees so they will pressure VISA and MA to  give them a bigger cut of debit and credit card fees, and they may even start to explore alternative payment systems.

 

And that's where the second risk comes in.  The risk of various tech companies entering the space gives me pause.  Companies like Paypal have already entered the space, but other tech companies like Apple, Google, and MSFT could also get into this business in the future.  AmEx bought a company called Revolution Money, an investee company of Steve Case, which purports to be a low cost provider of payment systems (apparently, it doesn't charge merchants interchange fees).  Presumably, AmEx will aggressively try to obtain market share abroad with this company and could even replace its current business in NA with Revolution Money, though not anytime soon as that would cannibalize their high margin NA profits.

 

It seems almost inevitable that we will all eventually run transactions through our mobile phones .  So another question is whether some other payments system providers will be able to get a toehold on the phone and make deals with the banks to take market share away from MA and VISA.  That remains to be seen, but as contactless payment systems get incorporated into new phones, we could also see the phone hardware and software providers and the telecom companies get more involved in choosing which payment systems win on the phone.

 

The outlook is too cloudy, in my opinion, so I would only buy into MA and VISA and much lower prices.

 

AmEx has a bigger market cap, I think, because of their presence in emerging markets (both through partnerships and their own networks) and because they also take credit risk, which is a good thing in AmEx's case because that part of the business can't be destroyed by disruptive technologies or reform. 

[Guest Bronco]

Txlaw - I don't disagree with any of your points.  But I would like to take it a step further. 

 

I own Loews, and the government wiped out their preferred shares but common still exists.  Diamond Offshore has issues because of drilling restrictions.

 

Drug companies will be completely screwed in this country.  Medical insurance companies the same.  They are regulating the combined ratio?

 

Banks are getting squeezed by this new bill.  They can be profitable, but who knows what the impacts are.  I was looking at Exelon today (and actually bought a couple calls).  First the cap and trade bill will help them.  Then it won't.  More uncertainty.

 

The Joint Committee on Taxation recently released a report on income shifting.  What these idiots in Washington don't get is that you could create millions of jobs EASILY by lowering the US Corporate Tax Rate to 20%, place a small excise tax on repatriated dividends, and put a huge tax on exported intangibles (and related royalties).  Instead, Obama is looking at increasing business compliance costs and punishing profits overseas.  This guy is job creation joke. 

 

Before I get upset, my point is that this new normal makes it more difficult to pick industries that are winners.  Very frustrating.  Stocks I do like by the way are Loews, BRK, Pep, JNJ, PG, Apple, Goog.  Looking at EXC and ENR.  Own a little DPS.  When I find time, I will begin focusing on Canada, Brazil and some of the smaller LA and Asian countres.  I am growing tired of this nonsense.

 

Sorry about the rant...but let's get this country (USA) moving again. 

[Myth465]

I think the Interchange fee is much bigger then other interventions.

 

Stiglitz and several economists have pointed to it to show how the free markets sometimes fail to reduce prices. It has also been in the Economist quite a bit, and finally its just plain wrong. Why should Visa get a cut of every dollar that comes across their network when it literally costs pennies to move the money whether its $5 or $5,000,000.

 

You also have a huge special interest that will eventually push to have it reduced (Wal-Mart, and other retailers). Its also a big tax on the American public. I am not sure what was in the final bill, but know its not the last we have heard on these fees.

 

http://www.cuinsight.com/456/media/news/finance_reform_bill_impacts_interchange_fees.html

 

Following today’s Senate approval of the Finance Reform Bill, PSCU Financial Services’ Interim CEO Mike Yatros said he is extremely disappointed with the new debit interchange legislation and rules that will give merchants new control over usage of cards at the point of sale.  

 

The final bill includes the following actions:

 

   * The Federal Reserve Board will regulate debit interchange rates. These rates cover all debit and prepaid cards, signature and PIN, and all card payment networks. Financial institutions with less than $10 billion in assets are exempt from the interchange rate action.

   * Retailers can offer discounts for payment method (cash, check, debit cards, credit cards and prepaid cards) but will not be permitted to offer discounts for payment network brands.

   * Retailers can apply minimum dollar amounts (no greater than $10.00) for credit card usage.

   * Issuers and networks cannot limit debit card transactions to only one network and cannot restrict a merchant’s ability to route transactions to any payment card network that processes their transactions.

 

----

 

Despite all this, Visa will mint money, I just have issues with the pricing. Imagine cash will eventually go the way of checks and will be replaced with credit card and mobile phones over the next 50 years.  Each year that pie for Visa gets much bigger.

[Baoxiaodao]

WoW, lots of good points. The only thing I want to add is that Visa is being followed by an army...... and a 60B plus company. So the chances are that market is efficient on this one.

 

[Ross812]

I really like Visa and with the recent court battles it seems to be trading at a lower valuation.  I just have a really hard time paying more than 20x earnings for something.  It hurts.  Does anyone think the expected growth is worthy of the steep P/E?  The only expensive stock I own is DHR but I only buy when P/E <18.  Should I follow this plan when trying to buy V?  Even at the height of the court battle uncertainty V only got down to 20.5x earnings.  Is V just too expensive to offer a margin of safety? 

[locutusoftexas]

Possibly irrelevant is anecdotal evidence that credit card fraud has very recently stepped up to a new level. Within the last four weeks, our two credit cards have been replaced successively by the issuers because counterfeit cards were used for several transactions at, respectively, Target and Sam's Club, in two other states. Then yesterday I found out that our next-door neighbor is also waiting for a replacement for her most-used credit card; a counterfeit card was being used at a Wal-Mart in another state. So the three counterfeit cards popped up in the last month and were being used at low-end retailers. Not enough data points for a pattern to be confirmed, but I am expecting that more sophisticated cards and transaction processing equipment at retail sites will be necessary in the future. This could hurt the top or bottom lines. I for one am going back to cash, except when using cash is very inconvenient or impossible. We use premium cards that give a percentage credit for transactions but I am old enough for the nuisance factor to override a small return of cash and a moderate step-up in transactional convenience.

[nodnub]

Possibly irrelevant is anecdotal evidence that credit card fraud has very recently stepped up to a new level. Within the last four weeks, our two credit cards have been replaced successively by the issuers because counterfeit cards were used for several transactions at, respectively, Target and Sam's Club, in two other states. Then yesterday I found out that our next-door neighbor is also waiting for a replacement for her most-used credit card; a counterfeit card was being used at a Wal-Mart in another state. So the three counterfeit cards popped up in the last month and were being used at low-end retailers. Not enough data points for a pattern to be confirmed, but I am expecting that more sophisticated cards and transaction processing equipment at retail sites will be necessary in the future. This could hurt the top or bottom lines. I for one am going back to cash, except when using cash is very inconvenient or impossible. We use premium cards that give a percentage credit for transactions but I am old enough for the nuisance factor to override a small return of cash and a moderate step-up in transactional convenience.

 

Locutus,

 

if this happened to both you and your neighbor I wonder if someone is stealing mail in your neighborhood for identity theft... Have you missed receiving any of your credit card bills?  Do you have a locked mailbox?

 

To combat this, credit card companies are moving to chip-based cards which include a smart chip and you use a PIN code instead of signing for the transaction.  I think they offer lower transaction fees to merchants for these PIN transactions because there is less chance of fraud?  (or they will institute higher fees for those that don't switch to the new smart chip reader terminals). This transition is happening right now in Canada.

 

 

[nodnub]

We use premium cards that give a percentage credit for transactions but I am old enough for the nuisance factor to override a small return of cash and a moderate step-up in transactional convenience.

 

I agree, I think I earn "reward dollars" of 2% of card transactions. Then I waste time looking through their catalog of useless rewards program crap that is priced at 70%-100% above normal retail prices. These inflated prices then reduce my benefit to ~1% of transactions. They don't list models numbers in catalog so it's hard to compare to retail or online prices.  What a waste of my time.  I started just donating my rewards dollars to charity through the credit card company.. it's much easier.  I think the premium card is bit of a racket, that is subsidized by users that carry credit card debt and also by the merchants.  Did you know that merchants pay a higher % processing fee when we pay with a gold rewards card?  I think I read that it raises the fee to about 2-4% instead 1-2%.

 

[locutusoftexas]

nodnub,

 

Thanks for your comments. We have electronic billing, so we receive no paper bills in the postal mail. I am excited to hear about the upgrade in your cards for enhanced security. So far my card companies offer neither of the options that you mentioned. I would welcome this as it would probably eliminate the vast majority of problems that we encounter here. I prefer not carrying cash if at all possible. As a matter of choice and good fortune, I never carry balances on the cards either.

 

I have been mildly interested in VISA and Mastercard as investments but have not bothered to look at financials or the dividend yield. I contend that, for the small investor [under $500 million -- okay, maybe a little less], the various value measures are not very relevant, once we ascertain that the company is financially sound. This is because the small investor cannot buy the company as our friend Warren does, so the only way a small investor can be paid with any certainty for his risk is through dividends. Extending Benjamin Graham's benchmarks, I would insist on being paid twice the 10-year treasury bond yield. Even then, however, the T-bond yield is too depressed for that to be a useful measure for holding a stock. I don't know what the yield on these credit card companies is at the moment, but I am guessing that it is not enough.

 

Thanks again,

Tex

[bookie71]

Fraud must be a huge problem.  Yesterday, I ordered some software online, and before I had even opened the email acknowledgement, Visa called to confirm as the software company had sent a $1.00 hold on the account to verify it was a good account. Those folks are scared.

[ShahKhezri]

You don't have to get comfortable at 20 P/E (not that should make a difference it growth is higher).  The Company, right now is at 13-14 FY11 P/E. 

 

With V and/or MA, there is definitely a moat.  The capital allocation decisions are pretty interesting, dividends/buybacks will grow.  On the acquisition front, I don't have a concern.

 

For a better understanding of the business, I would look up the Sequoia Funds investor day transcripts the past few years. 

 

I own V.