V for Victory?

For Sterman's preview heading into the Visa conference call, please click here.

(Author's note: Additional research for this article was provided by Peter Garcia.)

Visa (V - commentary - Cramer's Take) reported strong third-quarter results after the market closed yesterday, but the shares are down around $3 in early trading.

Net income was $422 million, or 51 cents a share, compared earning $299 million the same period last year. Excluding one-time charges, the company earned 59 cents a share, beating analysts' expectations by 11 cents a share. Revenue rose to $1.61 billion from $1.37 billion, an increase of about 17.5%. The results were driven by fee revenue from international transactions, which rose by 44%, to $449 million.

On the conference call, management noted that U.S. payment volume rose about 12%, to $388 billion, while payment volume outside the U.S. increased to $264 billion, more than 31%. The international strength is impressive, but a weak dollar and reduced airline travel could eventually impact international payments -- something perhaps most analysts and investors do not take into consideration.

CFO Byron H. Pollitt took a generally bullish tone on the call. He guided up on what operating margins would be for 2008 -- management now expects operating margins to be in the mid-40s; it previously estimated some "margin compression" in which margins would have been in the low 40s. He also mentioned how a "share repurchase program could come as early as 2009."

Visa is certainly performing well in this difficult environment, but the stock trades at a rich multiple and further upside may be hard to achieve. That being said, bullish sell-side reports could give a temporary further tailwind.

The stock has fallen from its all-time high of $89.84 on May 7, 2008 to under $70.00 on July 1, 2008, a drop of about 23% in just two months. The stock is back up to $80.00 which is about 49 times 2008 EPS, a multiple I find too rich for the company to sustain during this depressed market conditions. The company can, and will, continue outperforming, but the results do not necessarily mean it will translate into the stock.

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David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.