Leave Visa in the Dow, Not Your Portfolio

 | Sep 23, 2013 | 12:00 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

v

,

ibm

,

msft

,

xom

,

aapl

Congratulations go to Visa (V) for being named one of the 30 members of the Dow Jones Industrial Average last week.

On that news, Visa jumped more than 2% on Friday while the overall market was down. Joining the Dow industrials is a prestigious step, deserving of celebration.  But I don't recommend adding Visa to your portfolio.

Visa shares sell for more than 10x revenue. That's about 5x the price-to-revenue multiple for International Business Machines (IBM), and close to 3x the multiple for Microsoft (MSFT).

The price- to-book value ratio for Visa is 4.6. That's about double the price-to-book ratio for Exxon Mobil (XOM). And the price-to-earnings ratio for Visa is 24. That's double the P/E for Apple (AAPL).

As a value investor, I avoid stocks selling for such fat multiples. But suppose you are a growth investor. Does Visa have enough growth and profitability to justify its hefty valuation? I don't believe so.

Granted, Visa enjoys fat profit margins, about 47% last year. But other measures are good rather than great. Here is a comparison with the four companies mentioned above.

Company

Return on Equity

Apple

32%

Exxon Mobil

22%

International Business Machines

83%

Microsoft

30%

Visa

20%

Visa has the lowest return-on-equity figure of the five, even though it is more expensive, by various measures, than they are.

In the fiscal year that ended June 30, 2013, Visa earned just under $27 billion. Two fiscal years earlier, in FY2011, it earned just over $27 billion.  That doesn't sound like a growth stock deserving a premium valuation.

According to consensus thinking, we are entering a period of rising interest rates. And for once, I think the consensus is right.  Will that help Visa or hurt it?  It seems to me that it will hurt it, by making consumers slightly more reluctant to use their credit and debit cards.

Is Visa a good company? Yes. Is it a good stock, in my view? At the moment, no! 

Columnist Conversations

The prominence (and amount of) of the discounting in the malls this weekend has been very noticeable. One are...
3 insiders sold a total of 518,620 Starbucks (SBUX) shares for proceeds of $43.449 MM. 4 insiders dumped 558,1...
Yum Brands saw both insider buying and selling reported last week. One insider bought 10,000 shares for about ...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.