Valuing Visa: Is the Price Right?
With the number of paper-based payments falling worldwide and electronic payments increasing, Visa Inc could be perfectly positioned to take advantage of this change in global payment trends.
After its record-breaking IPO in March, our research analyst Anthony Grech looks at the relative value of Visa compared to its rivals, as well as the potential for any upside in the company's share price.
Below is a summary of the latest free report from IG Index. You can access the full version in the TradeSense Databank found in the PureDeal platform.
Visa vs. MasterCard
Visa Inc is the largest and most recognised payments company in the world, processing some 44 billion transactions across the globe in 2006 - a figure significantly higher than its closest rival MasterCard at 23.4 billion.
It is no surprise therefore that its initial public offering in March 2008 was fully subscribed by the public and Visa received £19.6 billion in gross proceeds, making it the largest IPO in US history.
For the purpose of the report, Visa is compared most easily with MasterCard rather than credit card companies such as American Express, as they are both open-loop operators. This means that they provide payment platforms for third-party financial institutions, but do not extend credit, issue cards, set fees or determine interest rates for customers.
Looking at historical valuation multiples of MasterCard and Visa at IPO stage, we can attempt to establish whether Visa's IPO of $44 a share was attractively valued compared to its rival. On the assumption that MasterCard was fairly valued, 'relative valuation' analysis of Visa and MasterCard's pro-forma financials, adjusted to conform to their relative fiscal year endings, reveals that Visa's shares were listed at a premium to MasterCard's historic price to earnings (PE) of 25x. This means that Visa's PE of 35.6x, given its greater market share, was reasonable.
Other factors to consider, however, include:
- Price to book
- Price to sales
- Enterprise value to EBITDA
- Pre and post IPO fundamentals
It is also necessary to consider the number of risks associated with shares in MasterCard and Visa, including competition, reliance on a relatively small pool of clients, non-exclusive agreements with key clients, and various regulatory and legislative changes and litigations.
The future for Visa's shares
Visa's share prices surged over a short period before the IPO, suggesting that the market had already factored in any potential upside in the share price. The report points out that the surge in Visa's value is a reflection of the market's perception of its premium over MasterCard, as it is the market leader in an industry that is poised to continue growing at a rapid rate.
However, MasterCard's share prices made a fivefold increase over a two year period – could Visa also retain any upside potential for its shares? Or will investors feel that, although MasterCard's initial listing was undervalued and the share price rose, unlike Visa it was probably benchmarked against closed-loop platform providers, minimising the likelihood of increasing share prices?
Trading on share prices
Whatever your views on the value of Visa or any other share price, you can take a position and profit on your judgements with IG Index. If you feel that shares in the payments industry do not have much upside left, you may wish to capitalise on any downward trends by going short on the share prices of some major companies.
However, if you believe there is still room for share prices to rise as the global payments industry continues to expand, you could go long.
Take a more in-depth view on Visa Inc with our specialist report from IG Index analyst Anthony Grech, available to all clients. Apply for an account and get set up in minutes.
The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.
Updated: 12 May 2008