Visa Inc.: Growth at a Reasonable Price (GARP) Opportunity

Visa Inc. (NYSE: V) presents a compelling GARP opportunity, leveraging its robust growth potential and significant share repurchases to offer substantial upside. Despite a seemingly high forward P/E ratio of around 28x, Visa’s valuation becomes more attractive when factoring in its projected earnings growth. Additionally, a discounted free cash flow (FCF) model indicates a large margin of safety, further bolstered by consistent share buybacks, which accelerate earnings per share (EPS) growth.

Growth Potential and Valuation

1. Earnings Growth:
   • EPS Growth: Analysts project Visa’s EPS to grow at a CAGR of 11.3% from fiscal 2024 to 2026, increasing from $9.94 in 2024 to approximately $17.04 in 2028.
   • Declining P/E Ratio: Based on this growth, Visa’s forward P/E ratio is expected to decrease to 19x by 2027 and 16x by 2028, making the current valuation more reasonable.
2. Market Leadership:
   • Scale and Reach: Visa’s network spans over 200 countries, 14,500 financial institutions, 130 million merchant locations, and 4.3 billion payment credentials, enabling $15 trillion in total volume and 276 billion transactions in FY23.
   • Growth in Digital Transactions: Visa is well-positioned to benefit from the expansion of digital transactions and e-commerce, with significant revenue and earnings growth reported in the first half of fiscal 2024.

Return on Capital Employed (ROCE) and Sustainable Growth

1. ROCE Analysis:
   • Historical ROCE: Visa’s average ROCE has been around 105%, indicating efficient capital utilization.
   • Reinvestment Rate (RR): With an average RR of 10%, Visa’s organic growth rate is approximately 10.5%. Including an average inflation rate of 2%, the nominal growth rate reaches 12.5%, aligning with consensus estimates.
2. Discounted FCF Model:
   • Model Parameters: Using a discount rate of 9.8%, a growth rate of 11.3% for stage 1, and a terminal growth rate of 6.72%, the discounted FCF model suggests Visa is undervalued.
   • FCF Per Share: With an FCF of $10.14 per share, the model indicates Visa’s current price offers a large margin of safety.

Share Buybacks and Shareholder Value

1. Consistent Buybacks:
   • Historical Buybacks: Visa has consistently repurchased shares, with an average quarterly buyback of $2.93 billion over the past three years.
   • Buyback Yield: The net common buyback yield averages around 2.25%, combined with a cash dividend yield of 0.7%, resulting in a total shareholder yield of approximately 3%.
2. Tax Efficiency:
   • Stock Buybacks vs. Dividends: Buybacks are more tax-efficient, allowing shareholders to defer capital gains taxes until shares are sold, compared to the immediate tax liability of cash dividends.

Risks and Final Thoughts

1. Economic and Competitive Risks:
   • Economic Downturns: Consumer spending reductions during recessions can impact transaction volumes and payment fees.
   • Competition: Visa faces intense competition from Mastercard, PayPal, and fintech startups, alongside regulatory risks that could affect network fees.
2. Geopolitical Risks:
   • Global Operations: Visa’s operations in regions like Central Europe, the Middle East, and Africa could face headwinds due to geopolitical conflicts.

Conclusion

Visa Inc. represents a strong GARP opportunity, with its high P/E ratio justified by robust growth projections and efficient capital utilization. The discounted FCF model demonstrates a substantial margin of safety, and consistent share buybacks enhance the stock’s upside potential. Despite potential risks, Visa’s market leadership and growth catalysts position it well for sustained performance. Therefore, Visa Inc. stock is rated as a Buy, with expectations of continued positive momentum driven by its growth prospects and strategic capital allocations.