Business Overview

🎯Key Metrics

Total: 9.5/17

• +2✅✅ Projected Operating Margin: 65.63%
• +0 ⚠️ Projected 5-Year Revenue CAGR: 9.43%
• +2 ✅✅ Last 5-Year ROIC: 39.70%
• +1 ✅ Estimated Cost of Capital: 6.26% (lower than ROIC)
• -1 ❌ Last 5-Year Shares Outstanding CAGR: +0.15%
• +1 ✅ Projected 5-Year EPS CAGR: 12.38%
• +1 ✅ Projected 5-Year Dividend CAGR: 12.50%
• +1.5 ✅ Estimated Debt Rating: Aa3
• +2 ✅✅ Morningstar Moat: Wide
• +0 ⚠️ Morningstar Uncertainty: Medium

📈Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value using the estimated cost of capital;
• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;
• Historical P/E – we assume mean reversion to the historical P/E values;
• Historical EV/EBITDA – we assume mean reversion to the historical EV/EBITDA values.

I’ll put more weight on the DCF and EPS methods and only then the historical ones. Given the ever-changing landscape of the world and the whole business the company operates, it seems unreasonable to assume a higher probability of mean reversion to the historical averages of the company.

Cost of Capital

I’ve used the latest annual and quarterly financial statements of the company, the 10-Year US bonds as the risk free rate and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Also, given the fact that Moody’s does provide a rating for the company I’ve used it.

Cost of Capital: 6.26%.

This value will be used later as a discount rate in the valuation methods.

Please feel free to come up with your own values by using the tool I’ve used: Cost of Capital – The Fair Value Journal. It is and will ever be completely free 🙂

Discounted Cash Flows (Weight: 50%)

I’ve used the latest annual and quarterly financial statements of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

Some notes on the inputs above:

• Terminal Revenue Growth – I’m using the risk-free rate (10-Yr bonds of the US), because long term the company should not grow more than the rate of the economy. I’m using the risk-free rate as a proxy to it, so the terminal growth becomes it;
• Terminal Cost of Capital – I’m assuming here that the cost of capital will converge gradually to the same value as the industry averages;
• Initial and Terminal Tax Rate – Begins at its recent historical average of 17.5% and gradually converges to the industry average.

All the other inputs were taken from the financial statement or from analyst projections.

The DCF gives us an estimated fair value of 432.11 dollars for Visa.

Something that we can also do now is to play around with Monte Carlo simulations. What this will allow us to do is to simulate multiple DCF valuations with pre-defined ranges for each of the inputs. Each simulation will randomize the inputs between these pre-defined values. For this I also used analysts estimates.

As you can see from the above Visa seems to be undervalued given that its current price of 295 dollars is well below P10. From these simulations we can extrapolate that there’s more than 90% probability that the stock is undervalued at the current price.

As always take this single output, from this DCF valuation method, with a grain of salt. Let’s move on to the other valuation methods to get a clearer picture.

Please be free, as before, to fill in your own values. Make the valuation your own and do yourself a DCF valuation using your own assumptions: DCF – The Fair Value Journal

EPS Growth (Weight: 30%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed the company will bounce back a little to a 30 PE.

Then again, I used the Monte Carlo simulations to check how the estimated fair value changed as my assumptions were modified.

For the EPS growth I’ve used the analyst projections and for the target PE I’ve used on the lower end a 25 PE to allow for still more loss of the premium status of the stock from its current 27 PE and on the higher end set it to its historical average of a 33 PE.

Using this method, Visa that is currently priced at 295 dollars seems to be undervalued being currently valued below P10. This seems to be in line with what we’ve seen during the DCF valuation.

As before, feel free to try this yourself: EPS Growth – The Fair Value Journal

EPS Scenario Returns

We can also extrapolate some EPS scenarios to check how the returns may be, if we buy the stock at the current prices.

Feel free to give it a try yourself: EPS Scenario Returns — The Fair Value Journal

Historical P/E (Weight: 10%)

The current P/E (Price / Earnings) ratio is below its 10 Year average. This means that the company is a undervalued by this metric. Assuming a mean reversion to its historical average of 33.27 we can assume a fair value of 344.21 dollars.

For every type of historical and relative valuation you can use the same free tool: Historical / Relative Valuation – The Fair Value Journal

Historical EV/EBITDA (Weight: 10%)

The current EV/EBITDA (Enterprise Value / Earnings Before Interests, Taxes, Depreciation and Amortization) ratio is below its 10 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 23.99 we can assume a fair value of 319.10 dollars.

✍️Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values and margin of safety, but for me I would probably start buying below the 355.37 dollars mark, given the current moat and reliability of the company.

Please, as always, remember that the fair value estimate has a 100% probability of being wrong and it will never be a precise number, even if it has decimals next to it 😮

Overall, it seems Visa is undervalued at its current market price.

Fair Value: 387.07 dollars