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Top Picks 2017: Visa

01/09/2017 6:00 am EST


Douglas Gerlach

President, ICLUBcentral, Inc.

Our Top Pick for conservative growth in 2017 has more than 50% of the global volume in credit and debit cards, notes Doug Gerlach, editor of Investor Advisory Service.

Slower growth with an elevated P/E ratio held back Visa (V) last year. But with growth returning to Visa’s normal levels, we feel it is time to highlight its shares once again.

Visa’s high operating margin and strong cash flow are a source of tremendous appeal; pre-tax profits in fiscal 2016 were 64% of revenue and free cash flow was 33% of revenue.

It is expensive to develop these payment networks, but the marginal cost of providing additional services is very low. This high level of profitability makes us wonder how much there is left to squeeze out of costs.

Visa completed the acquisition of Visa Europe (previously a separate company) in June 2016, bringing in 3,000 issuing banks in Europe, 500 million customer accounts, and $1.6 trillion in payment volumes.

In the most recent quarter, Visa’s organic volume growth was 10% excluding the Europe acquisition and currency translation. This figure stands out in a low-growth world.

For fiscal 2017, Visa guides to 16%-18% revenue growth and mid-teens EPS growth. Future years should be helped by cost efficiencies from the Europe acquisition.

We foresee many years of strong international growth as cards replace cash overseas like they have in the U.S.

We are forecasting five-year EPS growth of 15%. At the end of five years, EPS could be about $5.82.

A repeat of the average high P/E of 22.1 could lead to a stock price of $158. Adding in a small dividend, the potential annual return approaches 16%.

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