I have been eyeing Visa ever since I exited my put fly for a nice gain a couple weeks ago. In the preview before earnings, I wrote the following about the technical and fundamental setup in the stock:
Technicals: V stock has been in an incredibly steady uptrend, especially given its size. The 2 year chart shows a stock that has only traded under its 50 day moving average (in pink) for a few months, and hasn’t even come close to touching its 200 day moving average (in black) since August 2011:
2 year V chart, Courtesy of Bloomberg
Based on Mastercard’s price action after a strong earnings report last week (the stock opened at all-time highs, only to fall right back into its trading range), I think the appetite for new buyers in the payment processors is close to exhausted in the short-term. The 50 day ma around 154 should be initial support, and the 2013 closing level of 151.58 is another important level on the downside. The stock’s all-time high of 162.77 is the only level of resistance.
Fundamentals / Valuation: The bullish drivers for the stock have been:
- Secular shift to electronic payments. That’s been an important driver of 15% sales growth and 25% earnings growth over the last couple years. Sales growth is projected to be 11% over the next 2 years, coupled with earnings growth of around 15%.
- International adoption of card payments. Visa has historically had a revenue split of 60% U.S., and 40% international. Over time the international growth is expected to be the driver as adoption of alternate payments spreads.
- New payment technologies. As mobile payments systems expand (an area of focus for both GOOG and AAPL), new transaction processing revenue opportunities open up for V.
These positives are all well and good, but what are investors paying for the good news here? Herein lies the problem with the bullish thesis. The lifetime chart of the Visa P/E multiple:
Visa Trailing 12 month P/E since IPO, Courtesy of Bloomberg
Visa’s multiple is near all-time highs, at a time when sales and earnings growth are expected to be lower than they have been over the past 3 years. Also, at this point, Visa is a $100 billion market cap company, and size alone usually implies a lower multiple given the difficulty of growing earnings as size increases.
I agree with all of the secular trends in Visa’s favor. I think the company has bright future prospects. But the stock here is no bargain, and a low 20′s multiple is likely fair value given growth prospects.
Fast forward to today, Feb 27th, and Visa stock has basically traded between 154 and 160 since earnings. However, its weakness this week has caught my eye, and it finally feels like Visa is ready for a convincing break of its longstanding support at the 50 day ma.
Along those lines, here’s the trade:
Visa (157.95): Bought the Apr 160/150/140 put fly for 2.45
- Bought 1 Apr 160 put for 5.60
- Sold 2 Apr 150 puts at 2.00 (for total of 4.00)
- Bought 1 April 140 put for 0.85
Breakevens: On April expiration losses above 157.55. Profits between 157.55 and 142.45. Losses below 142.45. Max profit of 7.55 at 150.