Equity analyst Dan Hincks of Vancouver-based investment firm Odlum Brown sees significant upside in the shares of Visa Inc. (V—NYSE). He reiterates his “buy” recommendation and 12-month target price of $260.
Visa operates the world’s largest electronic payments system. Visa cardholders are able to pay for products and services via credit, debit or prepaid cards in more than 200 countries.
All told, Visa ties together 2.1 billion account holders and more than 36 million merchants. It handles over 60 billion transactions a year totaling more than $4 trillion.
Visa has three key attractions. First is what Warren Buffett would call a “high economic moat.”
It would be very difficult for new competitors to enter the market to challenge Visa, whose future success is fed by current and well-established success.
Visa is popular with cardholders (and prospective cardholders) because so many merchants around the world accept it. At the same time, Visa cards are widely accepted by merchants worldwide because so many people use the card. It’s a virtuous, self-perpetuating cycle.
Mr. Hincks also likes the business model. Visa doesn’t actually collect interest because it doesn’t extend credit. Instead, banks do this: issuing the cards and taking on the credit risk. Visa simply takes in fees for each payment on its cards, for the number of transactions processed on its Visa Network and from international transactions (from currency conversion and cross-border fees).
As Mr. Hincks notes, Visa receives only a small portion of the dollar value of the transactions conducted with its cards. But it receives better margins and returns on capital than the card issuers (i.e., the banks).
Finally, Mr. Hincks likes Visa’s growth opportunities.
He breaks those opportunities down into four main areas: 1) Consumer spending; 2) The digitization of payments; 3) Increased acceptance by merchants; and 4) Visa Europe.
In terms of consumer spending, Visa benefits as consumers buy more goods and services using its cards. And consumer spending is expected to grow by an average of five per cent through an economic cycle. The business model also builds in a natural hedge against inflation.
Meanwhile, Mr. Hincks notes, about half of all transactions in the U.S. are still done with cash or cheques. Globally, that figure is roughly 85 per cent. He expects these figures to continue to shrink, especially as online purchasing gains traction.
The analyst also believes merchants will increasingly embrace electronic payments, as customers further demand this and newer, low-cost infrastructure–such as Square, Inc. and Apple Pay–emerges.
Lastly, Mr. Hincks points out that Visa Europe is still owned by a consortium of banks, as its parent company (Visa Inc.) was prior to 2008, when it was demutualized.
The banks, he points out, have a put option to sell Visa Europe at anytime. Mr. Hincks says this unit is not being run as efficiently as it should. He believes that if Visa buys Visa Europe, it should be able to boost its performance.
Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846