By William Patalon III
Money Morning/The Money Map Report
Visa Inc. (V) shares soared nearly 30% after the company's record U.S. stock offering yesterday (Wednesday), as investors bet that its dominant market position and the growing shift into electronic payments will translate into consistently escalating profits for the operator of the world's biggest electronic payments network.
After its 406 million shares were priced at $44 each – well above the expected price range of $37 to $42 a share – the Visa initial public offering (IPO) raised a record $17.86 billion. If an over-allotment provision of 40.6 million shares is utilized, the offering will raise an additional $1.79 billion – bringing the total proceeds to $19.65 billion.
Not only would that easily leapfrog the largest U.S. IPO to date – the $10.6 billion stock offering for AT&T Wireless, which occurred in April 2000 – it would actually place the Visa deal up close to the biggest global IPO of all time: The October 2006 IPO of the Industrial & Commercial Bank of China, or ICBC, which raised $19.1 billion – or nearly $22 billion when the over-allotment provisions were fulfilled.
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Visa's shares opened at $59.50 on the New York Stock Exchange (NYX), and traded as high as $65, before closing yesterday at $56.50, up $12.50 a share, or 28.41%. The run-up gives the San Francisco-based company a market value of nearly $50 billion.
But the long-term value is probably much higher, says IPO expert Louis Basenese.
"I think fair value rests near $80 in the intermediate term. Morningstar thinks $74 is the magic number," says Basenese, editor of The Hot IPO Alert and The Takeover Trader investment newsletters. "Either way, the current price means the stock's undervalued and represents a solid double-digit opportunity, a rarity in this volatile market."
A Unique Allure
It's Visa's unique position that makes it such an alluring investment, Basenese says. In fact, the Visa deal is one of the better IPOs to come down the pike in some time. For one thing, the company is the market leader, dwarfing its rivals in terms of both transaction volume and total transactions [See accompanying chart], he says.
Chart 1: Visa the Giant
As the largest processor of retail payments the world, Visa Inc. dwarfs its rivals. It accounts for 60% of the debit-card transactions in the U.S. market – a four-to-one advantage over rival MasterCard. As the chart demonstrates, it is also bigger by total transactions and total volume.
Sources: The Hot IPO Trader, Money Morning.
Visa is an electronic payments network that focuses on retail transactions. It actually acts as a facilitator of global commerce, enabling money and information to move among banks, retailers, consumers, businesses and even government entities.
There are three basic points investors need to understand – especially with the chaotic credit markets investors now face, Basenese says:
- Visa is not a credit-card issuer.
- It's not a lender.
- And it's not exposed to consumer-credit risk.
The bottom line: Visa is simply a transaction-processing company that collects a fee based on the number and dollar value of the transactions that it processes, he said. In short, this is a financial-services company whose shares investors can snap up with confidence and a feeling of safety, since there aren't any worries that another credit-crunch-related catastrophe could obliterate its business and send its shares into the ground.
"Visa enjoys one of the widest economic moats that a company can desire," Morningstar analyst Michael Kon wrote in a Wednesday research note.
A Changing World
Investors have been eager to grab shares in Visa's offering as shares of the much-smaller rival MasterCard Inc. (MA) have more than quadrupled in value since the company went public in May 2006. MasterCard shares have largely been untouched by the stock-market turmoil generated by the ongoing credit crisis and closed yesterday (Wednesday) at $206.39, down $1.86, or 0.88%. They are down 8% from their 12-month high of $227.18.
The fervor reflects investors' view that Visa is in a lucrative position as consumers and businesses alike rely increasingly on its electronic network to make payments instead of using cash and checks. Visa is expected to milk the phenomenon to become an even bigger cash cow than it already is.
Visa generated $5.2 billion in revenue last year as it handled more than 44 billion transactions totaling more than $3.2 trillion. The volume puts Visa far ahead of its main rival MasterCard, whose own shares have more than quintupled from their May 2006 IPO price of $39,.
Making Visa even more alluring to investors: The firm is very well insulated from the credit issues that have scorched the very banks that issue Visa-brand credit cards. The banks – not Visa – carry the consumer debt on their books. Visa generates revenue and profit from transaction fees, which have been advancing steadily for years. In fact, those fees even increased during the last two U.S. downturns – 1991 and 2001.
Indeed, since the last recession, Visa has been able to get consumers to increasingly use its debit and credit cards for the purchase of such staples as gasoline and groceries, and to cover such household budgetary costs as utility bills. The upshot: Visa estimates that about 42% of its transactions fall into the "nondiscretionary" category, way up from the 27% recorded for 2000.
"We operate in a large global market undergoing a significant shift from cash and check to electronic payments, said Visa Chairman and Chief Executive Officer Joseph W. Saunders. "We believe Visa is well positioned to build upon our past success and take advantage of this migration to electronic payments."
Reflecting management's confidence, Visa anticipates annual earnings growth of at least 20% for each of the next two years – and possibly longer. The company got off to a fast start in the fiscal first quarter that ended in December, reporting a profit of $424 million profit, up 70% from the comparable quarter the year before.
Investment bankers could still exercise an option to buy another 40.6 million Visa shares during the next 30 days. If that happens, Visa's IPO will end up raising $19.7 billion before expenses.
"To sell 400 million shares at a time like this is Herculean," David Menlow, president of IPOfinancial.com, told The Associated Press.
About $10 billion of the IPO proceeds have been earmarked to buy back shares from the banks that helped build up its network over the past 50 years. The biggest chunk – about $1.25 billion – will be paid to its largest customer and shareholder, JPMorgan Chase & Co. (JPM).
For banks, this payoff couldn't come at a better time. Worldwide, financial institutions have recorded losses and taken write-downs totaling nearly $200 billion as a result of the worst global financial crisis since the Great Depression.
According to filings related to the stock offering, another $3 billion from the IPO is being deposited into an escrow account to cover potential liabilities in lawsuits that have been alleging that Visa conspired to fix prices and stifle competitors' efforts. Analysts say that those legal issues are one of the few clouds hanging over Visa's stock, although the company's leaders contend that the escrow account and other contingency measures should protect investors.
Visa paid more than $2 billion late last year to resolve a suit with American Express Co. (AXP), but a similar case brought by Discover Financial Services LLC (DFS) is set to go to trial in New York on Sept. 9.
Visa listed JPMorgan Chase & Co. (JPM), Goldman Sachs Group Inc. (GS), Banc of America Corp. (BAC), Citigroup Inc. (C), HSBC Securities (HBC), Merrill Lynch, Pierce, Fenner & Smith Inc. (MER), UBS AG (UBS), and Wachovia Corp (WB) as joint book-running managers of the record U.S. stock offering.
[Editor's Note: Louis Basenese is the editor of The Hot IPO Alert and The Takeover Trader newsletters, and is a contributing writer to Money Morning. Basenese last wrote about how to profit from the takeover market. To learn more about The Oxford Club and its publications, please click here. Check out Money Morning's full investment research report on Visa's IPO].
News and Related Story Notes:
- Bloomberg News:
Visa Rises After Record $17.9 Billion U.S. Offering.
- Money Morning Special Investment Report:
Visa's Record IPO is Shaping Up as One of the Hottest Stock Offerings in Years.
- Money Morning Special Investment Report:
Visa's Record IPO Shaping Up as a Profitable Play for Long-Term Investors.
- Thomson Financial News: .
- Forbes.com: .
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.