V - Visa

[Liberty]

https://www.businesswire.com/news/home/20190625005454/en/Visa-Acquire-Rambus-Payments-Portfolio

[UK]

It seems everybody agrees V business is wonderful, but what is an appropriate valuation/multiple ranges for it? Is there any price/multiple for which you would sell or at least don’t buy V? Would you still hold it if it sells tomorrow for 40x next year earnings? 60x? More?

[peterHK]

It seems everybody agrees V business is wonderful, but what is an appropriate valuation/multiple ranges for it? Is there any price/multiple for which you would sell or at least don’t buy V? Would you still hold it if it sells tomorrow for 40x next year earnings? 60x? More?

 

A business growing 8% a year with 30-40% ROIC's and a 9-10% WACC has a justified P/E in the mid 30's range.

[Liberty]

It seems everybody agrees V business is wonderful, but what is an appropriate valuation/multiple ranges for it? Is there any price/multiple for which you would sell or at least don’t buy V? Would you still hold it if it sells tomorrow for 40x next year earnings? 60x? More?

 

A business growing 8% a year with 30-40% ROIC's and a 9-10% WACC has a justified P/E in the mid 30's range.

 

More than that, actually:

 

 

 

But the question always is, how sustainable the growth is and how strong the moat is. That's judgement calls that will impact the inputs of the DCF...

[peterHK]

It seems everybody agrees V business is wonderful, but what is an appropriate valuation/multiple ranges for it? Is there any price/multiple for which you would sell or at least don’t buy V? Would you still hold it if it sells tomorrow for 40x next year earnings? 60x? More?

 

A business growing 8% a year with 30-40% ROIC's and a 9-10% WACC has a justified P/E in the mid 30's range.

 

More than that, actually:

 

 

 

But the question always is, how sustainable the growth is and how strong the moat is. That's judgement calls that will impact the inputs of the DCF...

 

PCE grows at 5%, cash to card/online + B2B gets you 2-3% on top of that at least + operating leverage (incremental margins 90%+).

 

Visa is unique in that it's sustainable growth is probably 5%, and they've got decade long tailwinds that get you over 8% without too much trouble.

[Liberty]

It seems everybody agrees V business is wonderful, but what is an appropriate valuation/multiple ranges for it? Is there any price/multiple for which you would sell or at least don’t buy V? Would you still hold it if it sells tomorrow for 40x next year earnings? 60x? More?

 

A business growing 8% a year with 30-40% ROIC's and a 9-10% WACC has a justified P/E in the mid 30's range.

 

More than that, actually:

 

 

 

But the question always is, how sustainable the growth is and how strong the moat is. That's judgement calls that will impact the inputs of the DCF...

 

PCE grows at 5%, cash to card/online + B2B gets you 2-3% on top of that at least + operating leverage (incremental margins 90%+).

 

Visa is unique in that it's sustainable growth is probably 5%, and they've got decade long tailwinds that get you over 8% without too much trouble.

 

I'm sorry, I wasn't precise enough in my previous message.

 

I meant that if you truly have "A business growing 8% a year with 30-40% ROIC's and a 9-10% WACC has a justified P/E in the mid 30's range" long-term, it's worth more than mid-30s P/E.

 

The 20-30% sustainable delta with WACC that you mention is gigantic.

[DirtFloorPoor]

If the long-term EPS growth rate is 8% for a business with 30%-40% ROIC (and they retain all earnings) then ROIC will decline over time and PE multiples will compress. Consistent buybacks (which are effectively dividends for this math) means the company is not retaining all of its earnings - this is case for V/MA - will drive EPS growth above the long-term net income growth rate and delay multiple compression. Just my 2 cents.

[bizaro86]

If the long-term EPS growth rate is 8% for a business with 30%-40% ROIC (and they retain all earnings) then ROIC will decline over time and PE multiples will compress. Consistent buybacks (which are effectively dividends for this math) means the company is not retaining all of its earnings - this is case for V/MA - will drive EPS growth above the long-term net income growth rate and delay multiple compression. Just my 2 cents.

 

That also means there is some additional downside to a high multiple, as it will lower eps earnings growth. Because they can buy back less shares with their fcf, it adds less to their growth rate.

[Liberty]

If the long-term EPS growth rate is 8% for a business with 30%-40% ROIC (and they retain all earnings) then ROIC will decline over time and PE multiples will compress. Consistent buybacks (which are effectively dividends for this math) means the company is not retaining all of its earnings - this is case for V/MA - will drive EPS growth above the long-term net income growth rate and delay multiple compression. Just my 2 cents.

 

Good point, I was thinking of revenue growth for some reason, which through operating leverage and high incremental margins is lower than EPS growth in these businesses..

[John Hjorth]

Off topic:

 

Welcome on CoBF, DirtFloorPoor! [ : - ) ]

 

-Great starting post!

 

-Now back to topic again.

[Liberty]

https://www.pymnts.com/news/partnerships-acquisitions/2019/visa-acquires-germany-based-payworks/

[brk64311]

I think the table above should be used for illustrative purpose only, i.e. it demonstrates the directional relationship of ROIC, PE, growth rate. I am not sure if you can use it to justify actual PEs in the market place as the model assumes perpetual earning growth rate. For example, if you assume earning growth at 8% for the next 20-years but dropping to 4% thereafter to perpetuity, the PE using the same framework will be something like 20, vs 39 in the table.  Happy if anyone points out if I am missing something.

[KCLarkin]

I think the table above should be used for illustrative purpose only, i.e. it demonstrates the directional relationship of ROIC, PE, growth rate. I am not sure if you can use it to justify actual PEs in the market place as the model assumes perpetual earning growth rate. For example, if you assume earning growth at 8% for the next 20-years but dropping to 4% thereafter to perpetuity, the PE using the same framework will be something like 20, vs 39 in the table.  Happy if anyone points out if I am missing something.

 

Yes. That's why the duration of growth (and ROIC) (what Mauboussin calls Competitive Advantage Period) is so important. And that's why Visa and MC were undervalued for so long. Investors were either underestimating the durability of the growth or ignoring it altogether.

 

http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/cap.pdf

 

 

[Liberty]

I think the table above should be used for illustrative purpose only, i.e. it demonstrates the directional relationship of ROIC, PE, growth rate. I am not sure if you can use it to justify actual PEs in the market place as the model assumes perpetual earning growth rate. For example, if you assume earning growth at 8% for the next 20-years but dropping to 4% thereafter to perpetuity, the PE using the same framework will be something like 20, vs 39 in the table.  Happy if anyone points out if I am missing something.

 

Yeah, it's not intended to be used rigidly, but only as a guide to understand the relationship between various variables.

[LC]

I think the table above should be used for illustrative purpose only, i.e. it demonstrates the directional relationship of ROIC, PE, growth rate. I am not sure if you can use it to justify actual PEs in the market place as the model assumes perpetual earning growth rate. For example, if you assume earning growth at 8% for the next 20-years but dropping to 4% thereafter to perpetuity, the PE using the same framework will be something like 20, vs 39 in the table.  Happy if anyone points out if I am missing something.

 

Yes. That's why the duration of growth (and ROIC) (what Mauboussin calls Competitive Advantage Period) is so important. And that's why Visa and MC were undervalued for so long. Investors were either underestimating the durability of the growth or ignoring it altogether.

 

http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/cap.pdf

 

Thanks for posting this, I look forward to reading.

[Jurgis]

I think the table above should be used for illustrative purpose only, i.e. it demonstrates the directional relationship of ROIC, PE, growth rate. I am not sure if you can use it to justify actual PEs in the market place as the model assumes perpetual earning growth rate. For example, if you assume earning growth at 8% for the next 20-years but dropping to 4% thereafter to perpetuity, the PE using the same framework will be something like 20, vs 39 in the table.  Happy if anyone points out if I am missing something.

 

Yes. That's why the duration of growth (and ROIC) (what Mauboussin calls Competitive Advantage Period) is so important. And that's why Visa and MC were undervalued for so long. Investors were either underestimating the durability of the growth or ignoring it altogether.

 

http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/cap.pdf

 

Right. But can you really estimate CAP beyond 10 years or so?

 

I know people will keep telling me that "nothing will change with V/MA/banks in 10+ years" , so I'll respond that that's just status quo bias.  ;D

[KCLarkin]

I think the table above should be used for illustrative purpose only, i.e. it demonstrates the directional relationship of ROIC, PE, growth rate. I am not sure if you can use it to justify actual PEs in the market place as the model assumes perpetual earning growth rate. For example, if you assume earning growth at 8% for the next 20-years but dropping to 4% thereafter to perpetuity, the PE using the same framework will be something like 20, vs 39 in the table.  Happy if anyone points out if I am missing something.

 

Yes. That's why the duration of growth (and ROIC) (what Mauboussin calls Competitive Advantage Period) is so important. And that's why Visa and MC were undervalued for so long. Investors were either underestimating the durability of the growth or ignoring it altogether.

 

http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/cap.pdf

 

Right. But can you really estimate CAP beyond 10 years or so?

 

I know people will keep telling me that "nothing will change with V/MA/banks in 10+ years" , so I'll respond that that's just status quo bias.  ;D

 

I'll let Mauboussin answer that question (he will probably tell you to invert -- the stock price tells you Mr. Market's prediction for CAP and then you just have to bet on the over/under). At current valuation,  this is probably close to a toss-up. Forced to bet, I'd say current price is undervaluing the CAP. The issue with the current price is that it is likely very undervalued relative to earnings 10 or 20 years out. But because so much of the valuation is based on earnings 5+ years in the future, there is potential for a painful drawdown.

[Jurgis]

I think the table above should be used for illustrative purpose only, i.e. it demonstrates the directional relationship of ROIC, PE, growth rate. I am not sure if you can use it to justify actual PEs in the market place as the model assumes perpetual earning growth rate. For example, if you assume earning growth at 8% for the next 20-years but dropping to 4% thereafter to perpetuity, the PE using the same framework will be something like 20, vs 39 in the table.  Happy if anyone points out if I am missing something.

 

Yes. That's why the duration of growth (and ROIC) (what Mauboussin calls Competitive Advantage Period) is so important. And that's why Visa and MC were undervalued for so long. Investors were either underestimating the durability of the growth or ignoring it altogether.

 

http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/cap.pdf

 

Right. But can you really estimate CAP beyond 10 years or so?

 

I know people will keep telling me that "nothing will change with V/MA/banks in 10+ years" , so I'll respond that that's just status quo bias.  ;D

 

I'll let Mauboussin answer that question (he will probably tell you to invert -- the stock price tells you Mr. Market's prediction for CAP and then you just have to bet on the over/under). At current valuation,  this is probably close to a toss-up. Forced to bet, I'd say current price is undervaluing the CAP. The issue with the current price is that it is likely very undervalued relative to earnings 10 or 20 years out. But because so much of the valuation is based on earnings 5+ years in the future, there is potential for a painful drawdown.

 

I agree with you though I'm probably less positive about earnings 10 or 20 years out.  8)

 

Edit: there are also questions about reinvestment returns. E.g. the purchase mentioned upthread ( https://www.pymnts.com/news/partnerships-acquisitions/2019/visa-acquires-germany-based-payworks/ ) will possibly bring positive returns, but it seems to be in more competitive area with possibly worse growth and I'd guess worse CAP (if taken separately) than main V business. If that's how earnings are reinvested, you may get worse results going 10 - 20 years out than if you looked at main business CAP. (Again not saying it was bad acquisition, but using it to illustrate the point  8) ).

[SlowAppreciation]

I put together a quick Visa valuation model if anyone is interested. You can plug in your own assumptions for:

• payment volume growth
  
• transaction volume growth
  
• service fee yield
  
• data processing fee per transaction
  
• operating margin
  
• etc.
  

Original: https://docs.google.com/spreadsheets/d/138Ai2ifYT6jyo6v-ur8ASO0r-FycLlsdtFbr8Xj6W4k/edit?usp=sharing

If you want a copy: https://docs.google.com/spreadsheets/d/138Ai2ifYT6jyo6v-ur8ASO0r-FycLlsdtFbr8Xj6W4k/copy

 

Cells highlighted in green are editable once you make your own copy.

[Liberty]

I put together a quick Visa valuation model if anyone is interested. You can plug in your own assumptions for:

• payment volume growth
  
• transaction volume growth
  
• service fee yield
  
• data processing fee per transaction
  
• operating margin
  
• etc.
  

Original: https://docs.google.com/spreadsheets/d/138Ai2ifYT6jyo6v-ur8ASO0r-FycLlsdtFbr8Xj6W4k/edit?usp=sharing

If you want a copy: https://docs.google.com/spreadsheets/d/138Ai2ifYT6jyo6v-ur8ASO0r-FycLlsdtFbr8Xj6W4k/copy

 

Cells highlighted in green are editable once you make your own copy.

 

Interesting, thanks

[Jurgis]

I put together a quick Visa valuation model if anyone is interested. You can plug in your own assumptions for:

• payment volume growth
  
• transaction volume growth
  
• service fee yield
  
• data processing fee per transaction
  
• operating margin
  
• etc.
  

Original: https://docs.google.com/spreadsheets/d/138Ai2ifYT6jyo6v-ur8ASO0r-FycLlsdtFbr8Xj6W4k/edit?usp=sharing

If you want a copy: https://docs.google.com/spreadsheets/d/138Ai2ifYT6jyo6v-ur8ASO0r-FycLlsdtFbr8Xj6W4k/copy

 

Cells highlighted in green are editable once you make your own copy.

 

Thanks.

Can you elaborate on "International"? Is that percentage of cross-border transactions?

[SlowAppreciation]

I put together a quick Visa valuation model if anyone is interested. You can plug in your own assumptions for:

• payment volume growth
  
• transaction volume growth
  
• service fee yield
  
• data processing fee per transaction
  
• operating margin
  
• etc.
  

Original: https://docs.google.com/spreadsheets/d/138Ai2ifYT6jyo6v-ur8ASO0r-FycLlsdtFbr8Xj6W4k/edit?usp=sharing

If you want a copy: https://docs.google.com/spreadsheets/d/138Ai2ifYT6jyo6v-ur8ASO0r-FycLlsdtFbr8Xj6W4k/copy

 

Cells highlighted in green are editable once you make your own copy.

 

Thanks.

Can you elaborate on "International"? Is that percentage of cross-border transactions?

 

Harder to estimate than the other revenue sources because I don't think Visa explicitly breaks out what % of transactions are cross border, their payment volume or yield. I've seen estimates that the yield is around 1%, but still kind of a guess.

 

So this is just estimating growth in revenue, rather than the underlying drivers (payment and transaction volume).

[Jurgis]

Thanks. I "optimistically" bumped CAGR to 15/15/10 and PE to 25. That yields 11.3% return. Not spectacular.

Bumping PE to 30 yields 14.2% return. That would probably encompass the expectation of longer and stronger competitive advantage. Leaving PE at 25 and bumping the year to 2030, yields only 12.4% though.

 

Anyway, it's interesting.  8)

[Liberty]

Q2: https://s1.q4cdn.com/050606653/files/doc_financials/2019/Q3/Visa-Inc-Q3-2019-Financial-Results.pdf

 

https://s1.q4cdn.com/050606653/files/doc_financials/2019/Q3/Visa-Inc-Q3-2019-Financial-Results-Presentation.pdf

[SlowAppreciation]

https://minesafetydisclosures.com/blog/2019/7/23/part-ll-an-overview-of-visa