Visa IPO Should Offer Investors Positive Risk/Reward Benefit

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The following is an abridged version of Vivek Kumar's original post on the Visa IPO.

•••

Business

Visa (V) operates the world's largest retail electronic payments network and manages the world's most recognized global financial services brand. It provides financial institutions (its primary customers) with product platforms encompassing consumer credit, debit, prepaid and commercial payments. In this business, it competes with companies like MasterCard (MA), American Express (AXP) and Discover.

Reorganization (summary)

In October 2007 Visa completed its reorganization under which all of its operations (except the Europe operations (Visa Europe)) were brought under under one company: Visa Inc. (Visa Inc. and Visa Europe entered into a framework agreement providing for exclusive, perpetual, non-transferable trademark and technology licenses within Visa Europe's field of use and the provision of certain bilateral services).

The company issues different classes of shares to its existing sharesholders according to regions in which they operate (to fix liability for certain regional legal litigation).

Dividends

Visa currently intenda to pay a quarterly dividend, in cash, at an annual rate initially equal to $0.42 per share of class A common stock (representing a quarterly rate initially equal to $0.105 per share) commencing with the quarter ended June 30, 2008.

Revenue

Whenever you make a purchase using a card with the Visa brand name, either at a merchant establishment or online, you contribute to Visa's revenue. Visa normally generates its service fees revenue on the basis of "payments volume", and data processing revenue on the basis of "No. of transactions".

Company's current market position

  • As on September 30, 2007, Customers of "Visa" (mainly financial institutions) had issued 1.5 billion cards carrying it's brands. In other words, currently nearly 1.5 billion cards carrying Visa's symbol are under circulation the world over.

  • Visa-branded cards are accepted in more than 170 countries around the world.

Financials

Company has shown nearly 76% growth in revenues and nearly 107% growth in net income in the quarter ended Dec. 2007 as compared to the quarter ended Dec. 2006.

During the three months ended December 31, 2007, growth in operating revenues exceeded growth in payments and transactions volumes reflecting the continued impact of new service fees introduced in the second half of fiscal 2007 and changes in pricing for various services in regions outside the United States, these pricing changes will continue to generate ongoing benefits but will not contribute to revenue growth in the future to this extent. In addition, new and renewed volume and support incentive agreements executed late in the first quarter of fiscal 2008 are expected to increase volume and support incentives significantly during the second fiscal quarter.

Company's balance sheet is strong and cash flows are enough for Dividends and to support future growth.

Valuation/Offer value

At offer price of $39.50, Company's shares are available at PE of nearly 19 (annualizing first quarter FY 2008 adjusted net profit)

Points to consider before investing in stock markets

  • Current US economic outlook as any slowdown in US will effect the company's growth rate.

  • Current fluctuation in stock markets

Fundamentally company offers "low risk high growth" long-term investment opportunity (assuming that the company performs within expectations).

Company/Industry expectations

(these are just assumptions and the company can perform differently)

  • With rising popularity of plastic money due to different reasons like safety, security, easy to carry, more acceptability at merchant establishments and cross-border utilization, the company's market is likely to show a growth rate of 11% (06-'12 Cumulative annual growth rate) with Pacific Asia and Africa contributing the most in growth.

  • With the rising popularity of computers and the internet, the online shopping and e-commerce activities will rise and will help companies like Visa.

  • Due to its leading position and established relationships, the company should be able to make the most out of growing opportunities.

Negatives

  • Complex corporate structure.Visa's corporate and equity structure is complex due to its recent reorganization with various classes of shares, many of which are due for redemption within one year of this offering by utilizing money raised from this offering.

  • No direct link with its end users

    Visa doesn't issue cards and is totally dependent on its customers to issue Visa-branded cards to its end users.

  • Expected slowdown in growth rate.

    Although the company has shown significant financial growth rate during the three months ended Dec. 2007, in the future it is not expected to show similar growth due to economic slowdown and raised fees during the second half of FY2007 which are the main reasona recent growth is fully factored into current revenues, and expected increases in volume and support incentives.

    • This article reflects personal view of the author about the company and one must read offer prospectus and consult its financial adviser before making any investment decision

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