Swiping for Bargains

One of Warren Buffett's most astute market maxims is to be "fearful when others are greedy, and greedy when others are fearful." It's a reminder to investors that sometimes it's better to go against the grain and discount some of the near-term bullishness or bearishness.

Markets like 2022's are painful in the moment, when entire indexes fall in sweeping selloffs that leave practically nowhere to hide. They can also present opportunities to pick up unfairly discounted shares that have been dragged down by the broad declines, but may be in better shape than most. Those are the proverbial babies thrown out with the bathwater.

Visa stock presents one such opportunity today. The shares have slid 20% from their record high in July 2021, versus a 13% decline by the S&P 500  index in the same period. In fact, they are back near levels they hit in January 2020, before supercharged growth in digital payments drove Visa shares during the Covid-19 pandemic.

Yet not much has changed for the payment-processing giant. Visa boasts ample free cash flow, carries no net debt, and is a double-digit sales and earnings compounder for the foreseeable future. Its earnings and guidance for fiscal 2023, released after Tuesday’s close, confirm that those factors remain in place, yet Visa looks cheaper than it has been in years. It’s an opportunity that doesn’t come along very often.

“There just aren’t many companies that can grow with the kind of consistency [that Visa can],” says Ted Bridges, CEO at Bridges Trust, which counts Visa among its top 10 holdings. “They’re so embedded in the marketplace, and now the valuation risk has been reduced substantially.”

Visa isn't going anywhere. The company is responsible for settlement of more than $10 trillion across hundreds of billions of transactions annually. It’s an enviable business, with economies of scale, a deep moat, and wide profit margins. Visa brought in revenue of $29.3 billion in its fiscal 2022, which ended in September, and earned $16 billion in net income—a 55% profit margin. Free cash flow was $17.9 billion, a whopping 61% margin.

It’s also a rapid and consistent grower: Sales have increased by 11% annually over the past decade, while earnings per share have compounded at a 17% rate. “It’s very formulaic,” says MoffettNathanson analyst Lisa Ellis, who notes that in a highly uncertain macroeconomic and geopolitical environment, a little predictability should come as a comfort to investors. 

And yet, the stock is now on sale at a discount. After its decline over the past year, the stock goes for about 24 times estimated earnings over the coming year, compared with Mastercard 26 times and Visa’s own average of 30 times over the past five years. Visa’s current valuation multiple is a roughly 45% premium over the S&P 500, versus its historical average of a more-than 60% premium. The shares trade for about 23 times forward free cash flow, or a free-cash-flow yield of 4.4%.

That's an attractive entry point for investors willing to sit through a bit more overall market bumpiness in the coming months or quarters. 

Read the rest of our Visa stock pick here.