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Five Reasons to Embrace Visa IPO

Kevin Kelleher

And now, the IPO that we've all been waiting for.

Visa, the global electronic payments company, is set to price later Tuesday in what is likely to be the largest IPO in U.S. history -- and possibly the biggest one we are likely to see for some time.

Visa's member banks stand to gain a windfall, while investment banks may be hoping a successful Visa IPO heralds a return to a robust market for equity offerings, but it's probably the last hurrah of a cycle coming to its close.

Even so, the offering is a welcome distraction from that other big story in the financial markets, which shall not be mentioned here.

There had been some talk that the Visa IPO would be delayed, citing that ever-handy bugaboo "market conditions." But that's an excuse for wimps, and Visa's IPO is anything but a wimp. Visa has plenty of things in its favor. Here are five of them that could help provide the company a warm welcome on Wall Street:

1. Visa is not just the biggest U.S. IPO ever, it is one of the biggest, most recognizable brands to list on the public markets in some time. Google in 2004 wasn't as big, but maybe Kraft was in 2001 when it raised $8.7 million. Brand goes a long way in priming interests among individual investors.

Some 16,000 financial institutions have issued 1.5 billion Visa cards around the world, and they are accepted by 129 million merchants. Visa doesn't issue any of those credit cards itself, nor does it take on any consumer credit risk. But it does act as a valued front-end brand as well as a back-end payment processor.

Visa's brand has had little trouble in gaining acceptance around the world. In fact, much of its future revenue growth will come from Asia Pacific, Latin America and the Middle East, where consumer classes are expected to grow over the next decade.

2. Visa isn't exactly recession proof, but it does have an impressive record of maintaining growth throughout the past two economic downturns. According to Visa CFO Byron Pollitt, monthly payment volume has grown between 9% and 13% every year for each of the past 20 years, including the recessions earlier this decade and in the early 90s.

And thanks to Visa's growing business in the debit card markets, more of its revenue is coming from so-called nondiscretionary spending, which includes money for things such as gasoline, utilities and pharmaceuticals. In the early part of this decade, nondiscretionary spending accounted for 27% of these transactions, a ratio that rose to 42% last year.

3. Ten years ago, debit transactions were only a small portion of Visa's business. But they have been growing by more than 29% a year over the past decade, from 1.3 billion transactions in 1997 to 17.2 billion transactions last year. Visa is by far the leader in debit transaction processing, with more than 60% of market share.

Debit cards also have helped Visa expand into servicing merchants who rarely relied on credit cards. Most consumers are averse to paying for certain things on credit: movie tickets, parking lots, fast food and so on. But debit cards account for 85% of electronic transactions at fast-food restaurants, and today, McDonald'sMCD is Visa's second-largest merchant.

4. Visa has a few things working in its favor that could help push up profit margins in coming years. First, there are economies of scale. Since 2003, the number of transactions processed by Visa has increased by 61%. But the incremental cost of processing those transactions has risen by only 12%. So, the user cost per transaction has actually decreased by 55%, according to figures released in Visa's IPO roadshow.

Second, Visa has plans to cut operating expenses over the next two years. Management says it can eliminate $300 million through cutting personnel, professional fees and marketing and advertising costs. Finally, the company believes that it can cut its current tax rate of 41% to 35% or 36%, which it says is similar to the rate of rival MasterCard .

5. Finally, the equity plan that Visa set up last year is offering stock options to executives and employees alike. But unlike a lot of recent IPO candidates, the options are not priced far below the IPO itself, which gives insiders an incentive to cash out at the earliest possible moment.

Instead, the exercise price is tied to the offering price. So, the company has an incentive to see that its own stock rises in the aftermarket.

And Visa sees growth ahead for itself. Executives say net revenue growth will be between 11% and 15% in coming years, while EPS growth will be closer to 20%. And at the same time, the company is offering investors an annual dividend of 42 cents a share.

These are some of the stronger reasons to think that Visa will not only see a successful listing this week, but a possible strong performance over the coming months. Of course, there are some concerns that investors should keep in mind -- and I'll discuss those in a story tomorrow -- but for now this IPO may just be the tonic needed for a troubled stock market.

Know What You Own: Mastercard operates in the business services industry, and some of the other stocks in its field include American Express AXP and Discover Financial Services DFS. These stocks were recently trading at ($42.63, +2.21%) and ($16.05, +5.73%) respectively. For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.