Why you can still profit from Visa
Posted
Mar 21 2008, 03:04 PM
by
Bradley Meacham
This post was written by MSN Money columnist Michael Brush:
When Visa went public this week it was no surprise that investors applauded the IPO as "priceless."
Though the bankers behind the deal priced Visa stock at $44 per share, it traded no lower than $55 Wednesday, its first day out. Then it closed above $64 on day two (Thursday).
Investors scrambled to buy Visa shares for three reasons. First, the company will continue to benefit from a broad-based worldwide shift to the use plastic to pay for stuff. Visa also has plenty of cost cutting ahead to boost profit margins.
Third, the deal was priced cheaply to move in a tough market -- which brings up another aspect of this IPO which was unsurprising. To get the stock at that heavily-discounted $44 per share ahead of the IPO, you had to have special connections inside the clubby investment banking network behind the IPO -- which was brought public by the likes of Goldman Sachs, Merrill Lynch and JPMorgan Chase. Mere mortals, a.k.a. regular investors, need not apply.
With a hot IPO, "it is always hard for everyone to get shares just because the investment banks tend to give them to their bigger clients," says Nick Einhorn, a research analyst with Renaissance Capital.
But if you are a mere mortal, don’t fret. I think they can still make money in this stock, even if you didn’t get the juicy discounted price. Here’s why.
At $64.30 a share, Visa trades for the same valuation of its competitor MasterCard, or 30 times 2008 earnings. Yet Visa will see faster earnings growth for two reasons. First, it has more room for cost cutting, as a collection of associations that may not have been run at peak efficiency before being merged into the current company, says Morningstar analyst Michael Kon. Next, as the leading brand name in the space, Visa stands to collect more new business than MasterCard, as more consumers around the globe adopt credit cards.
Here’s some more good news for mere mortals. IPOs tend to be volatile -- as those lucky enough to get shares at the discounted price dump their holdings for quick profits. Mix in the overall market volatility, and there’s a good chance you could see Visa could soon trade back down to $55, which is Kon’s suggested buy limit.
But there’s no guarantee this will happen. So one strategy might be buy part of your position at a higher price, and then set limit orders to pick up the rest in the mid-$50 range.
Einhorn expects Visa to earn $2.50 a share next year, up from an expected $2.15 this year. If he’s right, the stock could be at $75 in a year, assuming it continues to trade at 30 times expected earnings. For more analysis of Visa, see my column on the company.
(Disclosure: Michael Brush doesn't own shares of any company mentioned in this post.)
