Is The Visa IPO a Buy?
The Visa IPO (initial public offering) is coming up soon. We all know that when Mastercard (ticker: MA) went public, it shot up like a rocket. Is Visa going to do the same thing? Some people think so. Some people don’t.
Visa’s got balls
It takes some balls for Visa to go public right now. With the U.S. economy in the grip of a credit crisis, the housing market having stalled out, inflation rising, and oil prices at record highs, the stock market is in the dumps. Companies who go public right now–especially financial companies–face a cold, scared investing public. Investors are much tighter with their cash right now, and Visa won’t make nearly as much money as they would if they went public in a strong market cycle.
Visa IPO Pricing
Visa is going to be selling 406 million shares for $37-$42 per share. At $39.50, which is right in the middle of it’s range, Visa would raise about $16 billion. That would make it the biggest IPO in American history–by far (ousting AT&T’s $10.6 billion deal in April, 2000). It would be selling more than half of it’s shares, which is more than what most newly-public companies sell.
Be careful, though. At $40/share, Visa is priced at 30x it’s annualized 4th quarter earnings.
- That means that when you buy a share for $40, you can expect about $1.33 in profit or earnings per share (EPS)
- That’s about 3.33% assumed return
Compared to what Mastercard is currently selling at (24x earnings), it looks kind of expensive. Compared to what Mastercard was selling at at it’s IPO (11x earnings), it looks really expensive.
You probably won’t be able to pick up shares directly from the investment bankers. They usually only sell to their biggest (i.e. richest) customers directly. But, you can pick up shares later that day from investors that sell.
Who’s banking on it?
Big banks like JPMorgan, Bank of America, CitiGroup, and lots of others, own a LOT of Visa shares. These banks are starving for cash right now. When Visa goes public, the big banks will be happy to redeem their shares at lofty valuations.
Another thing is that Visa (and the banks) are being sued right now for about $3 billion and it looks like they’re going to lose. The Visa IPO gives these banks the opportunity to dump their shares on the open market, releasing them from liability, and transferring it to the investing public.
Room for growth?
Visa is bigger than Mastercard. It processed about 60% of all credit card transaction in 2006 compared to Mastercard’s 39%. Logically, I would assume that over the next few years, Visa’s market share vs. Mastercard’s will move closer to a 50-50 relationship. I doubt if Visa will overtake Mastercard at a 70-30.
Since Visa has been private for so long, and owned by a network of big banks, their focus has been not on profitability and growth, but rather serving their owner-banks’ needs. Their transition to being a closely-watched public company is going to be tough for them. Because they’re so huge already, it’s going to be difficult for them to post impressive growth figures.
But at the same time, Visa is the biggest name in credit cards. It’s one of the most recognized brands in the world. It dominates credit cards like Coke dominates soda. It transcends countries and cultures. Their international operations are growing rapidly. Many emerging markets are just starting to use plastic instead of cash. Some haven’t evens started yet, but when they do, you know Visa will be ready to facilitate.
Before purchasing into the Visa IPO–which could take place as early as March 19th–I’m going to research Joseph Saunders and Hans Morris. Both of them are high-level executives at Visa that are going to have a heavy hand in their daily operations and brand development.
Although it doesn’t seem particularly attractive to me, I’ll probably be picking up some shares. Especially if I can pick them up in the low-30s. I expect that on the days after the Visa IPO, it will shoot up to the high-40s. I expect a pull-back after the first few weeks, at which point I’ll be looking at buying.
I don’t expect to be investing very heavily into it, though. There’s so many bargains and attractive opportunities in the market right now and I’m looking at some fatter pitches.