Visa's Stock Is Expensive and as Cold as Russia's Winter

NEW YORK (TheStreet) -- Visa (V) reminds us in its advertisements its cards are "everywhere you want to be." Unless you are in Russia, which has been hit with U.S. and European sanctions because of its actions backing rebels in eastern Ukraine.

But while Visa has over two billion branded cards in circulation accepted at 30 million global locations, investors are nowhere to be found. The company reports fiscal third-quarter earnings Wednesday.

Shares, at $221 currently, are expensive while being down nearly 1% for the year to date. There are much better places to put your money.

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Visa is a well-run company. Shares have gained 230% in the past five years. But management has no control over geopolitical issues. Like rival MasterCard (MC), Visa's volume is being hurt by sanctions in Russia. There are no signs that a resolution will be reached anytime soon.

Back in April, management warned analysts future revenue would be adversely affected from those Russia sanctions. Byron Pollitt, Visa's CFO, said:

"We have 100 million cards [in Russia] and it is not in anyone's best interest, inclusive of the Russians, to make those cards not available to their own citizens."

Calls and emails to Visa requesting additional comment on this situation were not immediately returned.

With the company having processed close to 90 billion transactions totaling $7 trillion in 2013, Visa's global presence spans far greater than Russian territory. But the country is still very important to Visa, which relies on international markets for 45% of its business. Consider, in 2013, Visa processed roughly 60% of the payment card volumes in Russia.

Visa ended relationships with two Russian banks in April, which caused weakness in cross-border payment volumes. Unless these banking relationships were restored during the quarter and/or Visa added additional banks to offset the loss, there's a good chance Visa will miss on its revenue numbers Wednesday.

Whether or not it meets or beats on its earnings depends on how well management has adjusted. This is because part of management's lowered guidance assumed "several pennies of earnings per share impact" from the sanctions in Russia, according to Byron Pollitt.

To that end, I don't recommend buying the stock ahead of the Wednesday's report. These shares, which are trading at over 21 times fiscal 2015 earnings estimates of $10.39, aren't cheap. This is more than four points higher than the transaction processing sector’s median P/E of 17.5.

The good news is the company is actively buying back its stock. In the most recent quarter, management took more than five million shares out of circulation at an average price of $217.61. There is still roughly $3 billion left to repurchase under the current authorization.

Still, even with the massive float reduction, shares are still down on the year. While this will help long-term earnings per share, investors are locking in gains given the geopolitical risks. Instead of Visa, consider AT&T (T) and Alcoa (AA), which offer better near-term potential while offering similar to better dividend yields.

Visa's long-term story hasn't changed one bit. I believe the Russia sanctions will eventually be resolved. Until then, there is no compelling reason to own this stock.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates VISA INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:

"We rate VISA INC (V) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, impressive record of earnings per share growth, compelling growth in net income and expanding profit margins. Although no company is perfect, currently we do not see any significant weaknesses which are likely to detract from the generally positive outlook."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 13.6%. Since the same quarter one year prior, revenues slightly increased by 6.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • V has no debt to speak of therefore resulting in a debt-to-equity ratio of zero, which we consider to be a relatively favorable sign. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.44, which illustrates the ability to avoid short-term cash problems.
  • VISA INC has improved earnings per share by 31.3% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, VISA INC increased its bottom line by earning $7.58 versus $3.13 in the prior year. This year, the market expects an improvement in earnings ($9.00 versus $7.58).
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the IT Services industry average. The net income increased by 25.8% when compared to the same quarter one year prior, rising from $1,270.00 million to $1,598.00 million.
  • The gross profit margin for VISA INC is rather high; currently it is at 68.13%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 50.52% significantly outperformed against the industry average.

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