Charge Ahead With Visa

03/31/2008 12:00 am EST

Focus: OPTIONS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Mark Skousen, editor of Trader Alert, says the credit card giant, which recently went public, should thrive despite the weak US economy.

There's been plenty of gloom and doom about the markets lately. [Recent] bearish cover stories in publications like The Economist and BusinessWeek historically have been excellent contrarian indicators.

Furthermore, insider buying has been particularly heavy lately. Insiders are not necessarily great market timers, but they are reliable indicators of value.

I'm not saying that this is the time to get fully invested in stocks. I'm only saying that the outlook is better than the consensus would indicate. And here's a new [recommendation: We recently] saw the debut of the biggest initial public offering in US history-Visa (NYSE: V).

The credit card giant, based in San Francisco, filed to sell 406 million shares at up to $42 apiece. But the offering was heavily oversubscribed and the shares quickly pushed higher in the aftermarket to hit a high of $69 before pulling back slightly.

I think these shares have much further to go. Here's why.

Let's start by taking a gander back at the IPO of Visa's arch-rival MasterCard (NYSE: MA) two years ago. It, too, was a huge offering. It also was oversubscribed and jumped in the aftermarket. But that was just in the early innings. Within months, the stock rose more than 400%.

Why? While credit card growth is old hat in the United States, it is just beginning to catch on in some countries overseas, particularly in emerging markets.

Right now, about half of Visa's revenue comes from the US. But the company is quickly developing the other half of its business, especially in huge markets such as India and China.

Remember, Visa earns a fee every time a cardholder makes a transaction. Imagine hundreds of millions of new customers, each making dozens of transactions each year, and you can see that this is a superb, long-term growth story, even if the current economic environment is suppressing domestic credit card transactions.

According to The Nilson Report, a newsletter that covers the global payments industry, the worldwide purchasing card market will grow 11% a year during the next five years.

Bear in mind, Visa already is the world's largest processor of retail payments. It accounts for 60% of the debit-card transactions in the US market-four times as much as MasterCard.

Yet the company's risk profile is quite low. That's because Visa is not a credit card issuer or lender. Rather, Visa is merely a transaction-processing company that collects a fee based on the number and dollar value of the transactions it processes.

In its most recent quarterly report, Visa generated $430 million in profits on $1.49 billion in revenue. And I expect earnings to rise another 22% this year.

So pick up Visa at market today. And place a protective stop at $50. (The stock closed below $63 Friday-Editor.)

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