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Visa Inc (V) Is Tier One

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“And, by the way, the bulk of the billions in Berkshire Hathaway has come from the better businesses… And most of the other people who’ve made a lot of money have done so in high-quality businesses.” — Charles Munger

At Tier 1 Investments, a Motley Fool Real-Money Portfolio, I seek out and invest in elite businesses. These include companies with the strongest competitive advantages and greatest growth opportunities. I call these businesses Tier 1 enterprises, and Visa Inc (NYSE:V) has earned its place among the elite.

Visa Inc (NYSE:V)

A wide moat
Visa Inc (NYSE:V) operates the largest credit card payment network across more than 200 countries and territories, placing the company in an excellent position to profit from the massive global shift toward electronic payments and away from cash transactions.

As a financial services company, having a respected and trusted brand is of paramount importance. Visa has been able to build such a brand thanks in part to successful advertising campaigns such as “It’s everywhere you want to be” and “More people go with Visa.” Visa then bolstered its brand image by earning a reputation for the reliability and security of its payment processing platform.

Visa Inc (NYSE:V) also enjoys powerful network effects, as each new merchant that accepts Visa makes the network more valuable to consumers, and each new consumer that carries Visa increases the potential pool of customers for participating merchants (thanks to an easier means of purchase, and therefore likelihood of sale).

Visa earns a small fee from every transaction that passes through its payment network, and its tollbooth business model produces steady, fast-growing cash flow. It also helps Visa Inc (NYSE:V) earn extremely impressive operating and net income margins (59.9% and 20.6%, respectively, in 2012). Those are some of the highest I’ve seen among all the companies I follow, and they are strong signs of competitive advantage.

The numbers tell the story
Visa’s powerful brand and network have helped the company build massive scale. Three numbers in particular help demonstrate this:

2.1 billion: How many cards displayed Visa’s logo as of December 31, 2012.

82 billion: The number of transactions (payments and cash) the company processed over the last year.

6.5 trillion. The dollar amount of the total transactions that flowed through Visa’s network.

From these numbers, you can get a sense of the tremendous scale this business already enjoys. But the most important number, and what’s most exciting to me, is the number 85. That’s the percentage of global transactions that are still made via cash or check. Thus, Visa Inc (NYSE:V) is an already dominant business, but it still has tremendous room for growth as the world continues to move away from cash payments and toward electronic payments. And few companies are as well-positioned to benefit from this trend as Visa.

A new leader at the helm
Leading Visa toward this exceptional profit opportunity is newly minted CEO Charles Scharf, who took the reins in November 2012. While I typically like to see a longer track record of success when it comes to the CEOs of the companies I invest in for Tier 1, Scharf does have considerable leadership experience from prior roles such as head of JPMorgan Chase & Co. (NYSE:JPM)‘s retail banking and mortgage operations. And Scharf is already quite familiar with Visa’s operations; he served on Visa’s board from 2003 to 2011. I will be watching Scharf closely to see that he’s executing on Visa Inc (NYSE:V)’s growth strategy, and I believe he has the skills necessary to be successful in the role. But what gives me even more confidence is that, as my colleague Joe Magyer has said, an investment in Visa is not “a jockey bet. We’re betting on the horse.” And by that I’m referring to Visa’s trusted brand, powerful network effects, and massive scale advantages.

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