Trade Idea(s) – $V: Overstayed Visa

by Dan February 5, 2016 3:35 pm • Commentary• Trade Ideas

On January 28th Visa (V) reported fiscal Q1 results that beat expectations, and offered in-line guidance. The stock rallied 7.5% the next day.  On the earnings call management suggested that the strength of the dollar is impacted results, per Bloomberg:

  • Uneven global economy, negative effects of strong USD “meaningfully” reduced cross-border vol., rev. growth; “these headwinds do not appear to be abating in the short-term”: Charlie Scharf, CEO
    • Continues to see relatively strong payments vol. growth; fundamentals of business ‘‘remain strong”; long-term growth trajectory ‘‘remains intact”
  • Affirms yr outlook, though notes continued moderating cross-border vol. growth, “subdued” domestic activity across geographies may affect results
    • Still sees yr adj. class A common EPS up low-end of midteens range (constant FX basis), with ~4ppts negative FX impact (prior view Nov. 2); yr outlook doesn’t include any Visa Europe impact

Here is the thing, Visa has performed very well in a very challenged global economy for some time, as almost 40% of their sales come from outside the U.S.. But could the slight caution emanating from the recent guidance cause investors to consider how the stock should be priced in a lower growth environment?  This is exactly what is happening to other mega-cap stocks of late, and just today Microsoft is down 4.5%, Facebook down 6%, The Home Depot is down 4.25% and Google down 3.5%, all of these stocks are considered best of breed, have shown very good relative strength but all trade well over a market multiple.

Visa falls into this category.  In fact, consensus earnings estimates are calling for 7% eps growth in fiscal 2016, its slowest eps growth since going public in 2008, and the only year with single digit earnings growth. Visa trades at 25x that 7% expected eps growth. Whoah.  The peeps that are peeling out of mega-cap leaders could get this stock soon.

I would also add that while the uptrend from its 2009 lows has held like a boss, in this market, a break of the trend could easily mean much lower lows given the stock’s premium valuation.

Visa since 2008 IPO from Bloomberg
Visa since 2008 IPO from Bloomberg

If you are inclined to make a defined risk bearish bet targeting the August 24th low of $60, you might consider the following trades.  

If you thought the stock might have a sharp drop in the coming weeks (similar to what we are seeing in other highly valued mega-caps stocks), a put spread targeting the $70 breakdown level and $60 support might look attractive in March:

Short term Bearish:
Buy V ($71.25) Buy March 70/60 Put Spread for $1.75

-Buy to open 1 March 70 put for 2.05

-Sell to open 1 March 60 put at 30 cents

Break-Even On March Expiration:

Profits: of up to $8.25 between $68.25 and $60, max gain of $8.25 below $60

Losses: up to $1.75 between $68.25 and $70, with max loss of $1.75 above $70

Or  

If you thought the stock might grind lower in the coming months, You might want to consider a wider put spread in June:

Intermediate term bearish:  

Buy V ($71.50) Buy June 70 / 55 Put Spread for about $3

-Buy to open 1 June 70 put for $4

-Sell to open 1 June 55 put at $1

Break-Even On June Expiration:

Profits: of up to $12 between $67 and $55, max gain of $12 below $55

Losses: up to $3 between $67 and $70, with max loss of $3 above $70