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Executive summary

Thesis: Backed by strong company fundamentals and a dominant position in a high organic growth market,
Visa has the ability to capitalize on its overlooked pricing moat, improve operating margins, and authorize
additional share repurchases, while investors are focused on news surrounding the Company's potential
merger with Visa Europe.
Recommendation: Initiate a long position at Visa's current price of $71.19 (8/21/15) with a 6/30/16 price
target of $80.60 (+13.2%).
Catalysts: October update on Visa's potential merger discussions with Visa Europe, operating margin
improvements and authorization of additional share repurchases.
Company overview

Visa Inc. (Visa, the Company) is a payments technology company that connects consumers, businesses, financial institutions and
governments through its processing network, VisaNet, which facilitates authorization, clearing and settlement of payment transactions
in over 200 countries and territories. Visa also offers fraud protection for account holders and rapid payment for merchants.
Stock price as of 6/30/15
LTM Low / High
% of Low / High
Fully-diluted shares outstanding
Equity market value
() Cash & Marketable securities
(+) Total debt
(+) Minority interest
(+/) Other adjustments
Enterprise value

$15.0

$67.15
$51.24 / $69.62
131% / 96%
2,434.8
$163,498
(7,951)

$155,547

Financial summary (in $B)

$10.0

International
transactions
23%

$5.0

Gross revenues: $15.3B

(FY 2014A)

2012A

Net revenue

2013A

EBIT

2014A

Net income

Data
processing
34%

Other
5%

Services
38%

Visa generates revenue from the relationship

between merchant banks (acquirers) and
cardholders banks (issuers).

Service revenues are primarily generated from

payments volume on Visa-branded cards and payment
products for purchased goods and services.
Data processing revenues are primarily generated
from the number of transactions processed, for
authorization, clearing, settlement, network access and
other maintenance and support services
International transaction revenues are primarily
generated from cross-border payments and cash
volume, for cross-border transaction processing and
currency conversion activities
Client incentives (accounted for as reductions in
operating revenues) consist of contracts with
financial institutions aimed to build payments volume,
grow product acceptance and win merchant routing
transactions

The merchant is any entity a store, restaurant, online retailer, hotel or airline that accepts Visa as payment
The acquirer is a financial institution that enlists merchants to accept Visa payments and ensures they get paid for each transaction
The issuer is a financial institution that provides Visa-branded cards or other Visa-branded payment products to consumers and
businesses. When a Visa-branded credit card is used, the issuer "lends" the consumer the funds to complete the transaction. If it is a
debit or prepaid card transaction, the funds are automatically withdrawn from the account and transferred to the acquirer
The account holder is any consumer or business using a Visa card or other Visa-branded payment product to make purchases

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Competitive overview

Visa leads the payment processing industry and is well positioned to capitalize on favorable industry trends.
Visas longer-term corporate strategy:

Competitive overview (CY 2013)

Payments
volume

Discover

100%

Total volume

Total
transactions

MasterCard

We do view our incentives going up as a good thing. Incentives go up when we're

driving more business through the system Charles Scharf (CEO and Director)
We continue to move forward with our work to enter the domestic Chinese
payments market, and look forward to growing our investment within China
Charles Scharf (CEO and Director)

Cards

American Express

Visa

Working in partnership with Samsung, we are able to bring secure mobile

payments to millions of consumers around the world Ryan McInerney (Global
President)

Credit Card Market Share by Purchase Volume

100%

50%
0%

Debit Card Market Share by Purchase Volume

50%
2010

Discover

2011

MasterCard

2012

2013

American Express

2014

Visa

0%

2010

2011

2012

MasterCard

Visa

2013

2014

Visa has a wide economic moat:

Visas widespread acceptance among merchants and use among cardholders creates strong network effects that amplify each other.
The payment processing space has a long runway that is unlikely to be captured by newcomers.
Visa enjoys economies of scale unmatched by its peers, due to the Companys market leading position. Visas EBIT margin was
60.6% in FY2014A, compared to 29.9%, 38.2% and 23.6% for American Express, MasterCard and Discover, respective for their
fiscal 2014 years. Also, Visa is the best positioned of its peers to capture low-hanging market share internationally Visa reported
21% y-o-y growth in international transaction revenues in fiscal Q3.
Visa possesses and exercises its pricing power. This advantage is magnified by favorable industry trends: growth in transaction
volume, growth in number of transactions and growth in widely untapped emerging markets.
Visa has established technology and research teams, and has the relationships and infrastructure in place to capitalize on the rapidly
expanding mobile payments market (volume is expected to grow from $50 billion in 2014 to $142 billion in 2019).
Variant views

Shareholder-friendly initiatives Visa has a history of returning value to its shareholders through share buybacks and dividends.

$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0

The Company authorized $5B buybacks

programs in both October 2013 and October
2014. As of 2015 fiscal Q3, Visa had remaining
authorization to buyback $2.8B of shares. We
expect Visa to issue additional $5B buyback
programs in fall 2015 and fall 2016, which will
drive EPS growth.

Shareholder-friendly initiatives ($ millions)

FY2010A

FY2011A

FY2012A

Share buybacks

FY2013A

Dividends

FY2014A

Capacity

FY2015A
(through Q3)

Visa paid annual dividends (adjusted for stock

split) of $0.48, $0.40, $0.33, $0.22, $0.15 and
$0.125 for fiscal 2015 fiscal 2010
respectively, representing y-o-y growth of 20%,
21%, 50%, 47% and 20% respectively. We
expect Visa to continue increasing its dividend
payments at a rate of 20% y-o-y.

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100%

Debit Card Market Share by Purchase Volume

90%

Charles Scharf (CEO and Director): We do view our incentives going

up as a good thing. Incentives go up when we're driving more business
through the system. Visas client incentives as a % of gross sales is
projected to be ~17% in FY2015E and FY2016E. Meanwhile,
MasterCards Rebates (their name for client incentives) as a % of gross
sales is expected to be ~29%. Despite higher client incentives,
MasterCards revenue growth lags that of Visa.

80%
70%
60%
50%
40%
30%
20%
10%

0%

Debit card purchases market share Over the last several years,
Visa has steadily lost debit card market share, while MasterCard has
gained market share. We expect Visa to win back market share over the
next several years.

2010

2011

2012

MasterCard

Visa

2013

2014

Visas recent debit card purchase volume has also been weighed down
by low gas prices, as 75% of gas purchases are on debit cards.
However, the increase in consumer disposable income has not flowed
into purchases elsewhere, creating pent-up demand. This pent-up
demand will likely be realized in the mid-term as energy prices recover
from multi-year lows.

Deepening economic moat Visa has the ability to implement competitive pricing initiatives. In January, the Company raised
network fees on U.S. credit card transactions by 2bps. In April, the Company raised fees on U.S. inbound cross border transactions by
40bps. JPMorgan estimates these increases added ~$50million and ~$80million in FQ3 Service Fees and FQ3 International
Transaction Fees respectively. Moreover, these pricing initiatives are lagging, so margins (not factoring in currently favorable FX
volatility) should improve. On the other hand, MasterCard is not as well positioned to change pricing: This quarter we had really a
very, very small impact on pricing And you should not expect for this year, a lot of pricing to be coming through Martina HundMejean (CFO). MasterCard also has a stronger market share in Europe, where tighter regulation limits price increases.
Potential catalysts
8/21/15
Initiate long
position in Visa

Valuation

October Potential
authorization of new
share buybacks
9/30/15 Update on Visa's
potential merger discussions
with Visa Europe

2016
Earnings
releases
October
Potential dividend
payment increase

6/30/16
Price target
of $80.60

Revenue: Expected to increase by 14.6% in FY2016E (EBIT margin is roughly flat due to higher client incentives driving sales), driven by increased growth in
services and data, flat growth in other revenues, and slower growth in international transactions due to an artificial increase in Q3 due to FX volatility. Revenue
growth slows to 9.9% by FY2019E. Client incentives as a % of gross sales: "We expect incentives as a percentage of gross revenues to be in the range of 17.5% to
18.5% for the full 2015 fiscal year" FY2014 10-K.
Operating expenses as a % of net sales: We expect moderate margin improvement over time. Personnel, marketing and networking and processing expenses as a %
of sales decrease over time due to economies of scale, while D&A/sales and capex/sales converge over time. Based on the above assumptions, EBIT margin and Net
Income margin improve from 60.6% and 42.8% respectively from FY2014A to 67.3% and 44.4% in FY2019E
Working capital items: Flat-lined as a % of sales.
Share buybacks: None expected in Q4 as management indicated the Company cannot due to ongoing discussions with Visa Europe. Buybacks projected to jump up
to $5B/year in FY2016.
Dividend payments: Expected to increase by 20% y-o-y, in line with historic growth.

$6.0

80.0%

Profitability

$4.0

60.0%

$2.0

40.0%
FY2013A

FY2014A

FY2015E

Diluted EPS

FY2016E

EBIT margin

FY2017E

FY2018E

Net Income margin

FY2019E

20.0%

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Valuation

($ in millions, except per share amounts)

2015E
$13,820.0

Total operating revenues

Total operating expenses

$4,843.6
$8,976.4
(2,642.4)
$6,334.0
501.2
(408.4)
(735.2)
$5,691.6

EBIT (operating income)

() Income tax provision
EBIT less tax
(+) D&A
() Capex
() Change in WC
Free Cash Flow
PV of FCF

Capital Structure
Cost of debt
% debt
% tax rate
Cost of equity
% equity
CAPM
Risk-free rate
Market premium
Beta
Gordon growth method
Terminal growth rate
Terminal value
PV of Terminal value
Implied enterprise value
Implied equity value
Implied share price

Risks

7.455%

29.6%
7.5%
100.0%
2.3%
8.0%
0.64
3%
$223,417.5
$155,949.5
$186,624.1
$194,575.1
$79.91

WACC

WACC

$5,296.74

6.96%
7.21%
7.46%
7.71%
7.96%

Fiscal year ended September 30,

2016E
2017E
2018E
$15,835.1
$17,866.2
$19,902.9

$5,557.6

$10,277.5
(3,494.3)
$6,783.1
582.0
(515.2)
(59.2)
$6,790.8
$5,881.2

2.50%
$81.29
77.01
73.17
69.70
66.54

$6,155.6
$11,710.5
(3,981.6)
$7,729.0
678.9
(643.2)
(59.7)
$7,705.0
$6,210.0

$6,628.5

$13,274.5
(4,513.3)
$8,761.1
776.2
(756.3)
(59.9)
$8,721.2
$6,541.4

Terminal growth rate

2.75%
3.00%
3.25%
$85.34
$89.90
$95.07
80.60
84.61
89.13
76.36
79.91
83.89
72.56
75.72
79.24
69.12
71.95
75.08

2019E
$21,870.8

$7,141.7
$14,729.1
(5,007.9)
$9,721.2
874.8
(874.8)
(57.8)
$9,663.3
$6,745.2

3.50%
$101.00
94.25
88.36
83.17
78.57

Price target implied by DCF analysis

6/30/2016
Price target % upside P / FY2017E EPS
Visa (Bull Case)
$89.12
25.2%
26.5x
Visa (Base Case)
$79.91
12.2%
23.8x
Visa (Bear Case)
$66.54
(6.5%)
19.8x
Recommended price target based on P / E
6/30/2016
Price target % upside P / FY2017E EPS
Visa (Bull Case)
$87.31
22.6%
26.0x
Visa (Base Case)
$80.59
13.2%
24.0x
Visa (Bear Case)
$63.80
(10.4%)
19.0x

Macroeconomic slowdown, reduced consumer spending, loss of market share, margin pressure from increased pricing competition
Effects of FX volatility, Russian sanctions and developments in China on cross-border volume growth and international transaction revenue
Ongoing regulation on pricing, especially internationally; Ongoing litigation with regards to alleged noncompetitive pricing with MasterCard

Outstanding due diligence

Put option / merger with Visa Europe What does the revaluation of the put option imply about the chance of a merger? Would this deal be accretive or dilutive?
How would this impact the Companys capital structure? If/when this deal happens, would / how would pricing be payments processing industry?
FX volatility Visa recently experienced strong international transaction revenues growth due to FX volatility. How will the continued strength of the USD as well
as the likely devaluation of Asian currencies (to stay competitive following Chinas devaluation of the yuan) affect the companys operations going forward?
Incentive agreements It seems that the Company is experiencing increasing economies of scale with regards to its client incentives, but what are the actual
dynamics of the relationships between Visa and its customers (acquirers and issuers), and how are they changing over time, and relative to its peers programs?

Sources

Visa company website, SEC filings, investor presentations and fiscal Q3 earnings call transcript
MasterCard company website, SEC filings, investor presentations and fiscal Q2 earnings call transcript
Google finance, Yahoo finance
Wall Street equity research (Barclays, JPM, MS, Wells Fargo, RBC and Credit Suisse)
http://www.cardhub.com/edu/market-share-by-credit-card-network/
http://bits.blogs.nytimes.com/2014/11/17/u-s-mobile-payments-market-to-boom-by-2019-research-firm-says/
http://www.businesswire.com/news/home/20150301005067/en/Visa-Samsung-Bring-Mobile-Payments-Samsung-Galaxy#.Vdj2Y7JViko