This Could Be a Huge Catalyst for Visa Stock
It’s a big day for Visa Inc. (NYSE:V) stockholders on Monday morning with two big news items. The largest payments processing company in the world reported its fourth-quarter earnings, which were largely in line with what analysts were expecting. The company also announced details of its acquisitionof European entity Visa Europe. Visa stock, however, took a dive this morning by over three percent and is continuing to slide. Here’s why now may be the right time to put Visa stock under our investment radars.
On Monday, Visa confirmed it is acquiring its European counterpart, Visa Europe, in a $23.0 billion deal, of which $16.5 billion will be paid up-front. The deal will close by the end of March of 2016. The acquisition will bring the two entities back together that parted ways back in 2007, after which Visa emerged as a publicly traded company landing the U.S. and worldwide operations, while the European operations got separated as Visa Europe. (Source: “Visa to buy Visa Europe in deal that could exceed $23B,” Yahoo! Finance, November 2, 2015.)
Here’s What Visa Stockholders Need to Know
Visa’s strong position at the top of the industry already makes it a market leader in payment processing. The consolidation with Visa Europe will give the company the worldwide dominance that no other industry player will be able to match up to. With this consolidation, Visa will be able to add Visa Europe’s $1.7 trillion in annual payments to its payment processes.
Now, European markets still heavily rely on cash and checking payment modes. The market is relatively raw compared to North America. This will allow the company to tap into a market with higher growth prospects than the Americas.
The only concern here is Visa’s move to spend $23.0 billion for the deal, an inflated figure against the earlier speculated $20.0 billion. Visa is going to raise $16.0 billion for the deal off a high-grade debt offering. Although the company has a sound debt position, this will still add a big burden to its balance sheet. However, the synergies that are expected to flow from the transaction will help cover for the debt.
Visa stock is one of the least volatile investments on the market, with the stock consistently increasing in value since its stock market debut seven years ago. Visa’s history of stepping up dividends and share buybacks has kept the stock stable on the market. The company is also one of the few stocks that beat the market this year. Visa stock is up 17% year-to-date while the S&P 500 rose a little over one percent.
As a brand, Visa is a household name worldwide. The company operations face little to no barriers to entry in the industry. Earlier this month, USAA, one of the largest issuers of payment cards in the U.S., ended its longstanding relationship with Visa’s biggest competitor, MasterCard Incorporated (NYSE:MA) and shifted its financial transactions to Visa. This was a massive blow to MasterCard.
Fundamentally, Visa has an attractive balance sheet with a healthy cash position, low debt, and way higher margins than its competitors MasterCard and American Express Company (NYSE:AXP).
Here’s the Bottom Line on Visa Stock
Visa is trading close to its all-time highs. It’s understandable that Visa stockholders worry the stock could rout any day now, but I’m optimistic about its future as it consolidates its operations with the European operations. Visa stock is worth putting on your watch list after the recent dip.