Missouri-based investment firm Wedgewood Partners is bullish on Visa Inc (NYSE:V), a $286-billion market cap payments technology company headquartered in California. In its Q4 investor letter (you can download a copy here), the investment firm discussed the U.S. payment processor, calling it “an incredible cash-generating machine.” In this article, we are going to look at what comments made by Wedgewood about Visa in its letter to investors.
Visa was one of Wedgewood’s top performers in the fourth quarter and for the full year, according to the letter. By looking at the stock market data, we can see that the value of the company’s stock has increased by more than 50% over the last year.
Visa is a marvel – an incredible cash-generating machine. The multiyear tailwind of the global transition away from cash transactions continues unabated, driving solid double-digit growth in payment volumes, transactions, revenues and earnings throughout the year. As of the end of the September quarter, Visa estimates that after all of these years only roughly 10% of global payment volumes are paid by card; with cash, check, and ACH still making up the overwhelming majority of transactions.
Moreover, Wedgewood expects Visa Inc (NYSE:V) to enter the giant Chinese market and expand to under-penetrated areas of the payments industry.
We continue to expect Visa to benefit as electronic payments take share throughout the world and increase their penetration in all forms of transactions, from Personal Consumption (where cards have a relatively higher, but still small, share than in other forms of payment) to the significantly underpenetrated areas of business-to-business, person-to-person, and business-to-consumer.
The Company is not resting on its laurels with their success in the U.S. Back in June 2016, Visa purchased Visa Europe for a whopping $23 billion – adding over $15 billion on its balance sheet to finance the deal. The acquisition will recombine the global Visa brand after eight years as separate entities.
The Company has large ambitions outside of Europe, too. The U.S. payment processors have their collective eyes on the giant Chinese market. The $8 trillion yuan bank card network is currently dominated by state-backed China UnionPay. We expect the Company (if they haven’t already) to begin preparing to request licenses to operate in China.
Talking about valuation, Wedgewood said that:
Visa’s competitive position and competitive advantage is nearly unmatched. The Company generates buckets of free cash flow (FCF) to match its competitive position. Visa’s 5-year average FCF per revenues is an amazing 40%. But, like most of the market, Visa is trading at a healthy valuation on an absolute and relative historical basis, but we feel that the company’s steady and highly visible longer-term growth potential in volume, revenue, earnings, and cash flows establishes Visa as an attractive value in relation to our investment universe.
Visa’s shares have gained more than 54% during the past 12 months. The stock is up nearly 11% since the beginning of this year. Over the last three months, the share price has jumped more than 15%.
Meanwhile, Visa Inc (NYSE:V), the world’s second-largest card payment firm after China’s UnionPay, is a favorite stock among the hedge funds covered by Insider Monkey. There were 106 funds in our database with bullish positions in the company at the end of September 2017.