Visa (V) IPO – Comparative Valuation Analysis - MasterCard (MA) and American Express (AXP)

Recognized internationally for its outstanding business, Visa, operates the world’s largest electronic payments network. This core asset provides electronic payment services to financial institutions and merchants. Service fees ranks as Visa’s principal source of revenue. There are three components to their services:

1. Card Service Fees – Payments by customers - banks, government entities, etc. - for their participation in card programs carrying Visa’s brands. The fee is calculated based on the payment volume on cards carrying the Visa brand. The reporting is lagged by a quarter in that they are based on reported volume from the previous quarter.
2. Data Processing Fees – Transaction fees met chiefly by financial institutions. These customers (banks) in turn handle the transaction processing and payments services to merchants.
3. International Transaction Fees – Assessed to customers when the customer and the merchant are in different countries.

There are also certain miscellaneous fees associated with growth initiatives, optional service enhancements, licensing, and certification. Some of this revenue is offset by costs associated with various programs to build payments volume, increase card issuance, and product acceptance and increase Visa-branded transactions. The overall revenue is correlated to the volume of transactions flowing through their payments network. The revenue is split among these sources as follows (taken from their latest SEC filing):

Card Service Fees	52.65%
Data Processing Fees	36.13%
International Transaction Fees	20.24%
Miscellaneous	13.77
Volume and Support Agreements	(22.78%)

As Visa does not issue cards, set fees, or receive any payments from cardholders or merchants, they are immune to both the benefits and risks associated with the issuance of credit. Visa’s brand along with the universal awareness and acceptance it carries makes for a very strong business with high barriers to entry for competition. MasterCard (MA) which had its IPO last year is their primary competition. They also compete with financial institutions that have self-branded credit cards such as American Express. Below is comparison of Visa (V), MasterCard (MA), and American Express (AXP) financials:

Metric	American Express (AXP)	MasterCard (MA)	Visa (V)
Market Capitalization	53B	30B	52B
Dollar Volume	562B	1.9T	3.2T
Number of Transactions	4.5B	23.4B	44B
2008 Revenue	31B	4.68B	6.08B
2009 Revenue	33B	5.26B	6.93B
2008 Earnings	3.37	7.51	1.74
2009 Earnings	3.69	9.24	2.42
Share Price	46.11	226.57	64.48
Price to Earnings (PE) Ratio	13.8	30.17	37.06
Forward PE	12.5	24.52	26.65
Earnings Growth Rate (2009 over 2008)	9.5	23.06	39

The earnings growth rate for fiscal year 2009 when compared to 2008 indicates of a discounted valuation for Visa as growth rate exceeds the forward price to earnings ratio. Also, that growth rate factors in certain payment increases that Visa is currently benefiting which should be considered one-time events. Visa’s growth rate should correlate with the expected Compounded Annual Growth Rate (CAGR) of the global card purchase transactions. The Nelson report projects this metric to slowdown from a CAGR of 14% in the 2000-2006 timeframe to 11% in the 2007-2012 timeframe. That is an ominous projection and for Visa to realize anywhere near the growth rates of the last two years, they will have to either significantly expand market share and/or increase fees realized.

VisaNet, Visa’s global processing platform uses a centralized architecture that enables it to provide customers with real-time, value-added information and products. Furthermore, the design is flexible enough to quickly customize current offerings and rapidly develop, deploy and drive adoption of new products and services.

Visa has several risk factors that can materially affect its business. The effect of regulation of interchange fees charged by credit card issuers on merchants is a significant long-term risk factor. Even though, Visa does not receive any portion of the interchange fees, transaction volume can decrease if the regulatory environment is negative. Specifically, the default interchange rates set by Visa can be overridden by regulatory measures. Another major risk for Visa is the effect of host governments introducing rules that benefit domestic payments systems over global payment systems such as VisaNet. This could cripple Visa’s international growth opportunities. Significant litigation risk related to claims alleging Visa violating anti-trust laws related to interchange fees is another damper.

Visa is valued at a premium. Given the risks involved and the realizable growth rates, the valuation is not justified. Investors should wait for valuations to come down to reasonable levels before committing capital on Visa shares.