Visa Inc. Fundamental Analysis amidst DOJ investigation

Visa Inc. is a giant in the payment processing world, handling over 60% of U.S. debit transactions and generating billions in revenue through data processing and merchant services. But is Visa stock worth adding to your portfolio today? In this post, we’ll walk through our four-step valuation process to determine if Visa is a good investment opportunity.

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1. What’s in the News?

Recently, Visa faced an antitrust lawsuit from the Department of Justice (DOJ), which argues that Visa holds a monopoly position in the U.S. debit card market. According to the DOJ, Visa’s dominance—processing more than 60% of U.S. debit card transactions and earning over $7 billion from these transactions—warrants scrutiny. The DOJ claims that Visa’s practices, such as incentivizing exclusive contracts with merchants, have limited competition.

While the lawsuit led to a dip in Visa’s stock price, many investors question the merits of the case. Given Visa’s size and global reach, it’s challenging for competitors to gain market share, but that doesn’t necessarily make Visa a monopoly. Mastercard and other processors continue to actively compete in this space, and Visa’s success may simply reflect the strong network effect that underpins its business model.

2. Company Fundamentals

Visa’s core business focuses on providing payment processing solutions for consumers and merchants worldwide, including credit and debit card transactions. In recent years, Visa has also begun expanding into B2B and peer-to-peer transactions, strengthening its position in the digital payments ecosystem.

We use six indicators to check whether a company’s fundamentals are solid and healthy.

Item (Avg. 5 years)ValueCheck mark
Revenue growth9.53%
Net income growth17.13%
Free cash flow growth14.97%
Share buy back1.9%
Long-term debt/fcf0.87
Dividend growth15.52%
The fundamentals of Visa

3. Key Ratios and Metrics

Visa’s margins and ratios underscore its dominance:

  • Gross Margins: 76%
  • Operating Margins: 66%
  • Return on Invested Capital (ROIC): 30%

Visa’s gross margins demonstrate strong pricing power, allowing it to capture and retain value in the payments market. The high ROIC suggests Visa’s business is well-positioned to generate value for shareholders in the long term.

Visa also enjoys a low selling, general, and administrative (SG&A) expense ratio, currently below 10%. This efficiency is primarily due to Visa’s strong brand presence and the “network effect,” where merchants are incentivized to accept Visa payments simply because it’s a ubiquitous choice for consumers.

4. Valuation

To feed our formulas, we agreed on the following metrics:

ItemInput
Projection period15 years
Discount rate10%
Estimated growth rate12.6%
Projected P/E ratio35
Required rate of return11%
Margin of safety10%
Valuation inputs

1. Projection Period

  • Reason: The projection period spans 15, allowing for a thorough assessment of the company’s future financial performance. This duration captures multiple business cycles and provides a reasonable estimate of growth based on historical data and current market conditions. For Visa, a longer projection period (e.g., 10 years) may be warranted due to its established market presence and stable revenue streams.

2. Discount Rate

  • Reason: The discount rate reflects the risk associated with the investment and the opportunity cost of capital. For Visa, a commonly used discount rate might range from 8% to 12%, considering factors like the risk-free rate (e.g., U.S. Treasury yield), the equity risk premium, and Visa’s beta (volatility relative to the market). Given Visa’s strong financial position and established business model, a discount rate closer to the lower end of this range could be justified.

3. Estimated Growth Rate

  • Reason: The estimated growth rate for Visa’s revenues and earnings can be derived from historical growth trends and market analysis. Analysts might project a conservative growth rate of around 10% to 15% per year. This rate reflects continued growth potential in digital payments, new market opportunities, and expansion into B2B and international markets.

4. Projected P/E Ratio

  • Reason: The projected price-to-earnings (P/E) ratio is often based on historical averages and future growth expectations. For Visa, considering its dominant market position and high margins, a projected P/E ratio of 25 to 30 may be reasonable. This aligns with industry benchmarks and reflects investor expectations of continued earnings growth.

5. Required Rate of Return

  • Reason: The required rate of return accounts for the risk associated with holding the stock and the expected return based on the company’s historical performance and future prospects. For Visa, this might be set between 10% and 15%, reflecting the company’s stability, competitive advantages, and the broader economic environment. A higher required return could be applied due to potential regulatory risks, such as the ongoing antitrust lawsuit.

6. Margin of Safety

  • Reason: The margin of safety provides a cushion against uncertainties and reflects the investor’s risk tolerance. A margin of safety of around 15% to 25% is often recommended for growth stocks like Visa. This accounts for potential miscalculations in the financial model or unforeseen market changes, ensuring that investors can still achieve satisfactory returns even if the company’s performance doesn’t meet expectations.

Conclusion

Given the input above, our tool returns a fair value around $237,75 with a buy in price of $213,97 accounting for margin of safety of 10%. However, if you were to remove some of the outliers the company value will be getting closer to the current stock price. Given Visa’s size some investors might even want to engage in this stock at a small premium. However, remember to always do your due diligence before acquiring a stock in any given company.

Understanding Alibaba: Recent Developments and Investment Insights

Welcome to our in-depth analysis of Alibaba Group (NYSE: BABA), where we’ll explore recent market movements, financial fundamentals, and potential investment opportunities. With the Chinese economy undergoing significant changes, particularly after the recent stimulus measures introduced by the Central Bank, now is an ideal time to reassess Alibaba’s position in the market.

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Recent Market Developments

Three weeks ago, China unveiled one of its most aggressive economic stimulus packages since the pandemic, resulting in a surge of optimism across various sectors, especially in Chinese stocks. This monetary injection has reignited interest in companies like Alibaba, which has seen its stock price rebound from a low of $63 in October 2022 to around $110 recently. This recovery is a promising sign for both current shareholders and potential investors.

Financial Fundamentals

When analyzing Alibaba’s financial health, several key ratios stand out:

  1. Price-to-Earnings (P/E) Ratio: Currently at 18.5, Alibaba’s P/E ratio is significantly lower than the tech industry average of 38, indicating that the stock may be undervalued compared to its peers.
  2. Gross Margin: Alibaba maintains a robust gross margin of 31%, well above the industry benchmark of 20%, showcasing its efficiency in managing production costs.
  3. Long-Term Debt Coverage: Alibaba’s long-term debt is comfortably covered by its free cash flow, which has grown consistently over the past years, providing a cushion in uncertain economic times.
  4. Revenue Growth: While Alibaba’s revenue growth has plateaued, it has maintained a steady rate, with an average increase of around 10% annually.
  5. Share Buybacks: The company has been actively repurchasing its shares, indicating management’s confidence in Alibaba’s future and its perceived undervaluation in the market.

Comparative Analysis with Competitors

Alibaba’s performance can be compared to Western giants like Amazon and Google. Despite its challenges, Alibaba’s stock remains relatively cheaper, with a P/E ratio that offers a compelling argument for value-oriented investors. Moreover, while Alibaba operates in a challenging environment, its diversified revenue streams—spanning e-commerce, cloud computing, and digital media—position it well against its competitors.

Valuation Insights

In terms of valuation, analysts are predicting a conservative growth rate of around 1.27% annually, which many believe is overly cautious. Considering the recent economic stimulus, a more realistic growth forecast may range from 7% to 10%. Based on our assumptions Alibaba seems to be a little over valued at the moment.

Investors should conduct their own due diligence, evaluating the potential risks associated with geopolitical tensions and regulatory challenges that could impact Alibaba’s growth trajectory.

Conclusion: Is Alibaba a Good Investment?

For potential investors, Alibaba presents a compelling opportunity for those who would like to start a position at a marginal premium. However, the investment landscape remains complex due to external factors like geopolitical tensions and the overall health of the Chinese economy. As always, it’s essential to perform thorough research and consider your own risk tolerance before making investment decisions.

The Ultimate McDonald’s Stock Analysis: Is It Worth the Investment?

A woman is walking up to an American style Mc Donalds.

Whether you’re a seasoned investor or new to the market, McDonald’s is a popular stock that often catches the eye due to its robust fundamentals and iconic global presence. In this post, we’ll analyze the company’s key financial metrics, business model, and valuation methods to help you decide if McDonald’s is a worthy investment for your portfolio.

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What’s in the News for McDonald’s?

McDonald’s has made headlines recently, particularly during the U.S. election season. There’s been buzz around a claim made by one of the presidential candidates that they worked at McDonald’s. This news, although it might seem trivial, keeps the company in the media spotlight. As election debates heat up, McDonald’s remains a topic of discussion, making it an interesting time to evaluate its stock.

McDonald’s Fundamentals: A Closer Look

McDonald’s fundamentals remain strong, and that’s why the stock has maintained its appeal over the years. Let’s break down some of the key metrics:

  • Dividend Yield: McDonald’s boasts a healthy dividend yield of 2.1%. Additionally, with a dividend payout ratio of 53%, the company appears to be on solid financial footing, distributing consistent returns to its shareholders.
  • PE Ratio: The company’s PE ratio is currently at 21, which is in line with industry standards, particularly when compared to other consumer goods giants like Starbucks.
  • Profit Margins: McDonald’s gross profit margin of 55% and operating margin of 53% demonstrate the efficiency of the business. Their ability to optimize operations, coupled with the strength of their brand, contributes significantly to these figures.

Key Ratios That Matter

For investors, several key ratios can provide insights into McDonald’s operational efficiency and potential for future growth:

  • Net Earnings Ratio: Over 20%—a strong indicator of profitability.
  • Debt Coverage: McDonald’s long-term debt is covered by its free cash flow, at a rate of 5 times, showing strong financial health.
  • Share Buybacks: McDonald’s has consistently bought back shares, increasing the value for existing shareholders. In fact, 15.75% of shares have been repurchased recently—a positive sign for investors.

Understanding McDonald’s Business Model

One of the key factors behind McDonald’s success is its franchise model. Around 95% of McDonald’s locations are franchises, which means the company earns steady, recurring revenue through franchise fees while keeping operational costs low. McDonald’s typically owns the land on which these franchises operate, creating a dual revenue stream from both real estate and franchise operations.

This business model makes McDonald’s a reliable cash generator and positions it as a long-term player in the fast food industry.

Valuation Methods: How We Evaluate McDonald’s Stock

Now let’s dive deeper into the various valuation methods we use to assess whether McDonald’s stock is priced fairly.

1. Discounted Cash Flow (DCF) Analysis

The discounted cash flow method estimates the present value of McDonald’s future cash flows, factoring in its efficiency and operational excellence. Here’s how we break it down:

  • Projected Free Cash Flow Growth: We assume McDonald’s free cash flow growth will be 10-15% annually due to its robust operational efficiency.
  • Discount Rate: For DCF, we typically use a discount rate of 10%, which accounts for the risk of investing in individual stocks versus the broader market.
  • Valuation: Based on the DCF model, McDonald’s intrinsic value is estimated at $157 per share.

2. Benjamin Graham’s Formula

The formula of Benjamin Graham mainly focusses on the growth rate and the company’s current EPS ratio. According to this formula, Mc Donalds should be priced around $102.

3. Warren Buffett’s Rule of Thumb Formula

Similar to the Benjamin Graham Formula, the rule of thumb formula uses the same input however it undermines the 4.4% high yield bond rate that Benjamin included. Therefor this valuation is always slightly higher and prices the stock at around $146.

4. Target Valuation Formula

This formula emphasizes on the current EPS, an estimated P/E Ratio, growth rate and the period you are planning on holding the stock. This formula returned a valuation of $263

5. Intrinsic Value (NPV) Formula

This formula is a bit more elaborate and includes the cashflow, discount rate, number of periods, and residual value. This formula returned a price of $118.

Average valuation

Most statisticians know that the average is (almost) always right. Therefore, we are interested in what the average of all five formulas is. The average of all the formulas that we used is $157.63 which is a lot higher than the price it is currently trading for ($289).

Now let’s dive deeper into the various valuation methods we use to assess whether McDonald’s stock is priced fairly.

Should You Invest in McDonald’s?

While McDonald’s is a household name with an exceptional business model and solid fundamentals, its current stock price suggests it might be overvalued. However, if you’re a dividend-focused investor or looking for a stable, long-term addition to your portfolio, McDonald’s is certainly worth considering—especially if the stock price dips to more reasonable levels. But keep in mind that this valuation is based on our assumptions and should not be taken as financial advise.

Conclusion

McDonald’s is a well-established brand with strong financials, making it a potentially attractive stock for long-term investors. However, based on various valuation methods, McDonald’s appears to be overvalued at its current market price. It might be a good idea to keep the stock on your watchlist and consider purchasing when prices align more closely with its intrinsic value.

As always, do your own due diligence before making any investment decisions. If McDonald’s stock aligns with your investment strategy, it could become a valuable asset in your portfolio for years to come.