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.
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
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