Visa: Cheap at 28x P/E, After Double-Digit Growth Again in FY22 (NYSE:V)

Happy woman shopping online at home stock photos

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an introduction

We review our investment case on the Visa Inc. website. (New York Stock Exchange: V), with the share price back to where it was at the last update three months ago. We still think Visa is one of the best “leading” stocks on the market today.

Since we began our Buy rating on Visa in June 2019, the shares have gained 32% (including dividends) in about 3.5 years. Performance in 2022 was even more disappointing, with Visa shares losing 2.4% year-to-date.And the It is roughly in line with both purchase-rated Mastercard (MA) (lost 3.4%), and AXP-rated American Express (lost 4.3%):

visa Share price (last 5 years)

Visa share price (last 5 years)

Source: Google Finance (November 22, 2012).

Visa volumes and revenue have been steadily increasing since the COVID-19 pause in early 2020. In the most recent quarter, both revenue and adjusted EPS grew nearly 20% year-over-year, despite currency headwinds and the closure of Visa. business in Russia. Adjusted earnings per share for FY22 were up 26.8% year-over-year and 37.7% higher than 3 years prior. The FY23 guidance is another year of double-digit growth in revenue and earnings per share likely in constant currency, though earnings are H2-weighted and only growing in high single digits in US dollars. Visa stock currently trades at 27.8 times fiscal ’22 EPS and has a dividend yield of 0.9%. Our updated forecast indicates a total return of 108% (21.3% annually) by September 2026. Buy.

Visa purchase case summary

We believe the low teen EPS and premium valuation will continue, driven by:

  • Electronic payments volumes are increasing structurally due to GDP growth and the ongoing shift away from cash and checks; Even in the United States and Europe, a significant amount of consumer spending remains in cash; The potential is greater in newer geographies
  • Visa and Mastercard are increasingly penetrating into new payment segments including Business-to-Business, Business-to-Consumer and Peer-to-Peer; They are also increasingly offering value-added services that take advantage of their platform state and data wealth, adding further revenue growth.
  • Existing payment networks have natural advantages in terms of scale and network effects; Regulations guarantee a significant barrier to entry
  • Payment networks have natural operating leverage, being highly scalable and having largely fixed costs, so profits grow faster than revenues.

COVID-19 was an important short-term negative for Visa, as travel restrictions disrupted high-margin cross-border trading volumes, but a long-term positive, accelerating the shift to electronic payments.

Visa volumes and revenue have been steadily increasing since the temporary COVID-19 disruption in early 2020.

Visa’s revenue volume and growth is consistent

Visa volumes and revenue declined in the third quarter of fiscal year 2020 (April-June 2020), the first full quarter after the COVID lockdowns in the US and Europe, but have continued to grow since then. Interestingly, revenue grew sequentially in the last two fiscal quarters of the fiscal year, unlike the usual post-holiday seasonal decline seen in the pre-COVID years:

Visa proceeds versus volume (since Cy19)

Visa Revenue vs. Volume (since 2019)

Source: Visa filings.

NB. The fiscal year ends on September 30.

By the fourth quarter of fiscal ’22, Visa’s revenue had grown 61% from its lowest point. Its structural growth was strong enough to be clearly visible in the reported US dollar numbers, despite the strong US dollar impact and Visa closing its business in Russia in 2022. (Russia was 4% of Visa’s revenue for FY21; Ukraine was another 1%.) .)

Visa results for the fourth quarter of fiscal year ’22

In Visa’s most recent quarter, Q4 fiscal ’22, both net revenue and adjusted earnings per share grew approximately 20% year-over-year in US dollars; Excluding currencies, net revenue grew 22% and adjusted EPS grew 24%:

Visa P&L (Non-GAAP) (Q4 fiscal year 22 versus previous periods)

Visa P&L (Non-GAAP) (Q4FY22 vs. Prior Periods)

Source: Visa Results Releases.

NB. Service revenue for each quarter is based on volumes in the previous quarter.

While Visa’s P&L helped with the post-COVID recovery in travel, the advantage was primarily in international transaction revenue (up 51.6% yoy). All other revenue lines are still growing 10% or higher in USD terms, demonstrating the underlying strength of Visa’s growth. Management also stated that, in constant currency, revenue grew 20% or more in each of Visa’s three “growth drivers” – consumer payments, new flows, and value-added services.

Losing all Russia-related revenue since the third quarter of FY22 was a significant headwind. Excluding Russia and currency, data processing revenue grew 15%, net revenue grew 27%, and adjusted EPS grew 30% year-over-year.

Visa’s most recent acquisitions, Currencycloud and Tink, were a headwind to earnings, adding 0.5 percentage point to net revenue but 3 part per point in operating expenses.

Visa payment volume, if you exclude Russia and China in addition to the currency, was up 16% year over year. In fact, it grew by double digits in every region, except for CEMEA (Central Europe, Middle East, and Africa):

Visa Payment Volume by Region (FY22 Q4)

Visa Payment Volume by Region (FY22 Q4)

Source: Visa Results Supplement (FY22 Q4).

The 32.9% growth in Latin America and Canada (Latin America and Canada) is notable because it includes Brazil, where the new payment platform Pix (operational since November 2020) is seen by some investors as a potential threat to the Visa/Mastercard ecosystem. Visa’s continued strong growth in the region has shown that this is not the case.

Alternative platforms like PIX help Visa indirectly, as CEO Alfred Kelly explained at an investor conference in May:

“We think that both Pix and UPI (in India) are actually processing transactions that aren’t generally card transactions, they are new transactions… The reality is if these people help to be catalysts for digitization, as long as that’s a playing field it’s a good thing. To the ecosystem… we think Pix is ​​attracting different types of transactions, giving us the ability, now that these people are starting to pay in a different way than with cash… products and bring them to our bank to do other things with us, or in our fintech space”

The fourth quarter of fiscal 22 provided a good snapshot of how Visa is one of the strongest companies in our coverage.

Visa results for fiscal year 22

With a strong fourth quarter, FY22 adjusted EPS was 26.8% higher year-over-year and 37.7% higher than 3 years ago:

Visa P&L (Non-GAAP) (FY22 vs Pre sears)

Visa P&L (Non-GAAP) (Fiscal Year '22 vs. Prior Years)

Source: Visa Results Releases.

NB. Service revenue for each quarter is based on volumes in the previous quarter.

Russia and currency were also significant headwinds to our fiscal ’22 results, with the latter lowering net revenue growth and adjusted EPS growth by about 2 points each.

Nor does FY22 represent a complete recovery in travel. As we highlighted in Raytheon’s Q3 results review, passenger miles from global revenue (“RPM”) were still only 75% of 2019 levels in the July-September period (compared to 70% in April-June), while passengers from US via TSA checkpoints were only 91% of 2019 levels in July-September.

With these factors in mind, Visa’s growth rates for fiscal year 2019-22 are in line with our view of adjusted EPS growth in the mid-teens over the long term.

Visa forecasts for fiscal year 23

Visa’s fiscal ’23 guidance points to double-digit revenue growth and potential earnings per share in constant currency, including:

  • Net revenue growth would be in the mid-teens excluding currency and Russia, but high single digits in reported dollars
  • OpEx growth adjusted to be low double-digit excluding currency, but high single-digit in nominal dollars

Using our interpretation of what terms like “mid-teens” mean and adding other management comments, we believe Visa’s forecast for fiscal ’23 means 8% growth in adjusted EBIT and 6.5% growth in net income:

Non-GAAP P&L Projections (Fiscal Year Two)3) (our estimates)

Visa Non-GAAP P&L Forecast (FY23) (Our Estimates)

Source: Office Capital Estimates.

The gap between EBIT growth and net income growth is due to the higher tax rate.

Earnings growth in fiscal ’23 will be weighted on a second half basis, as the first half will continue to see a comparable contribution from Russia in the prior year, while new costs from the Tink and Currencycloud businesses acquired will be included from inception.

Other recent news

The US Federal Reserve finalized updates to its rules for debit card transactions in October, and as expected, this does not mean a slight change from the status quo. As the Fed’s press release states, “the final rule is broadly similar to the proposal made last year” and “does not amend requirements related to interchange fees.” Each debit card issuer’s requirement to enable two unaffiliated networks for non-card transactions has already been met by “many, if not most” visa issuers, according to comments provided by the department.

PayPal (PYPL) has reached an agreement with Apple (AAPL) to allow US PayPal and Venmo credit/debit cards to be added to Apple Pay, and for PayPal merchants to accept contactless credit/debit cards on the iPhone PayPal and Venmo apps. Accordingly, PayPal has indicated that its in-store strategy will now move away from QR codes to focus on credit/debit cards. This strengthens the Mastercard/Visa ecosystem, and directly benefits Visa as Venmo’s credit card issuer.

Visa announced on November 17 that CEO Alfred Kelly will step down in February 2023, to be replaced by longtime Visa and current president Ryan McInerney. Kelly has been CEO since 2013 and will become CEO (and is already Chairman). This appears to be a long-planned sequel that likely means continuity.

Rating – Is Visa Overrated?

At $210.33, for fiscal year ’22 financials, Visa stock is trading at 27.8x P/E and yields 3.9% FCF:

Net Income, Cash Flow, and Visa Valuation (FY19-22)

Net Income, Cash Flow, and Visa Valuation (FY19-22)

Source: Visa filings.

For CY21’s financials, Visa has a 32.5x P/E and 3.3% FCF yield.

Visa has a 0.9% dividend yield, based on a quarterly dividend of $0.45 ($1.50 annually), which was raised 20% in October.

Visa executed the equivalent of $12.5 billion in share repurchases in FY22, equivalent to 2.8% of current market value, with $11.6 billion in actual buybacks and adding another $850 million to MDL’s litigation guarantee account (which has Same effect as buybacks). $12 billion was added to the buyback program in October, leaving a balance of $17.1 billion.

Visa stock forecast

We have lowered our outlook for fiscal ’23 in line with the latest guidance, cut our multiple exit and extended our outlook into fiscal ’26.

Our main assumptions now include:

  • Net income growth in FY23 by 8% (was 12.5%)
  • From FY24, net income grows by 12.5% ​​each year (unchanged)
  • As of FY23, the number of shares is down 1.5% annually due to buybacks (unchanged)
  • Dividend for FY23 of $1.80 (was $1.90)
  • As of FY24, the dividend will be at a payout ratio of 22.5% (unchanged)
  • P/E ratio of 35x at the end of FY26 (was 40x)

Our new forecast for FY25 EPS is 2.4% lower than before ($11.00); Our forecast for FY26 EPS is $12.26:

Explanatory visa return expectations

Explanatory visa return expectations

Source: Office Capital Estimates.

With shares at $210.33, our forecast is for a total return of 108% (21.3% annually) by September 2026.

Can Visa shares be bought? conclusion

We reiterate our Buy rating on Visa Inc. stock.