Business Services company Visa is taking Wall Street by surprise today, falling to $272.78 and marking a -5.5% change compared to the S&P 500, which moved 0.0%. V is -11.37% below its average analyst target price of $307.78, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, Visa has underperfomed the S&P 500 by -15.3%, moving 18.9%.
Visa Inc. operates as a payment technology company in the United States and internationally. The company is a consumer cyclical company, whose sales and revenues correlate with periods of economic expansion and contraction. The reason behind this is that when the economy is growing, the average consumer has more money to spend on the discretionary (non necessary) products that cyclical consumer companies tend to offer. Consumer cyclical stocks may offer more growth potential than non-cyclical or defensive stocks, but at the expense of higher volatility.
Visa's trailing 12 month P/E ratio is 29.2, based on its trailing EPS of $9.33. The company has a forward P/E ratio of 24.6 according to its forward EPS of $11.07 -- which is an estimate of what its earnings will look like in the next quarter. As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US consumer discretionary companies is 22.15, and the S&P 500 has an average of 28.21. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand V’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
Visa’s PEG is 2.18, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in Visa's free cash flow, which was $19.7 Billion as of its most recent annual report. Over the last 4 years, the company's average free cash flow has been $14.34 Billion and they've been growing at an average rate of 10.2%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in V have received an annualized dividend yield of 0.7% on their capital.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Visa's P/B ratio is 13.6 -- in other words, the market value of the company exceeds its book value by a factor of more than 13, so the company's assets may be overvalued compared to the average P/B ratio of the Consumer Discretionary sector, which stands at 3.11 as of the second quarter of 2024.
Visa is likely fairly valued at today's prices because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and generally positive cash flows with an upwards trend. The stock has mixed growth prospects because of its strong operating margins with a stable trend, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into V's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
