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Ticker symbol: V (NYSE) S&P rating: A+ Value Line financial strength rating: A Current yield: 0.8%
If we wrote about a company with a steady 37 percent net profit margin and a global brand that was in the business of collecting small fees on every one of billions of transactions worldwide, a company that required almost no capital expenditures, plant, and equipment, nor inventory, a company that brought in more than a million dollars per employee in revenue and $436,000 per employee in net profit, a company with a time-tested business model and practically no debtwould you believe that it existed?
It does, and the company, formed in a 2007 reorganization and taken public in 2008, is Visa. Yes, the same Visa whose emblem has traditionally appeared on a majority of the world's credit cardsand now debit cards. The company operates the world's largest retail electronic payment network, providing processing services, payment platforms, and fraud detection services for credit, debit, and commercial payments. The company also operates one of the largest global ATM networks with its PLUS and Interlink brands.
For years, Visa has been synonymous with credit and credit cards, but in recent years has become more of a digital currency company, st.i.tching together consumers, retailers, banks, and other businesses in a giant global network; really, Visa is a global payments technology business that not only develops and supplies the technology but also collects fees upon its use.
The shift from traditional cash and check forms of payment to debit cards and other digital forms is growing at about a 14 percent annual rate, driven by the security and convenience of these transactions as well as a shift away from consumer debt more to "paid for today" debit transactions. Put away your checkbooksdebit payments are projected to increase 1520 percent in FY2011 and will account for more than half the company's overall business volume.
More than its rivals, Visa derives a significant percentage of transaction volume, about 35 percent, overseas. International volumes are growing faster than in the United States.
Financial Highlights, Fiscal Year 2010
With only three years of operating performance in the books, it is a bit harder to gauge the operating performance and potential for Visa. In its first three years, revenues have grown sharply from $6.26 billion in 2008 to a reported $8.06 billion in 2010, and are projected at about $9.2 billion for FY2011, ending September 2011. Per share earnings have grown from $2.25 to $3.91 over the same period, and are projected at about $4.70 per share. Because the company is for the most part a cash business without much capital equipment, earnings come closer to matching cash flow than in most companiessad because one gets used to seeing cash flows higher than earnings, but good because earnings accurately reflect the true earning power of the business. The balance sheet is strong: Visa exited FY2010 with only $29 million in long-term debteffectively zero against a market capitalization of $62 billion. The dividend today is small but growing, and we think patient investors will be rewarded with growing cash returns.
Reasons to Buy
Simply, it would be hard to come up with a better business modela company that develops and sells the network, and collects fees every time it's used? It would be like Microsoft collecting fees every time a file is created and saved, or a relatively unique e-mail platform that charges fees for every message. Visa is in a great position to not only capitalize on overall world economic growth, as most companies should be, but also to capitalize on a shift in this growth toward electronic payments. Indeed, the "mobile wallet" concept, where consumers can pay for things with a mobile device that reads a bar code-like QR (quick response), is very promising. With cellular providers recently abandoning a compet.i.tive platform under development, Visa stands in exactly the right place to benefit from this evolution. Overall, while Visa isn't a monopoly (MasterCard, American Express, and Discover are compet.i.tors), it has the strongest franchise, technology leadership, and pricing power at its back.
Reasons for Caution
The somewhat monopolistic power and pricing practices of credit card processors has come under public fire and government scrutiny, and mandates to limit transaction fees may hurt growth somewhat. Also, transaction processors are vulnerable to economic cycles, and a double dip or protracted recession would hurt revenues. Finally, although Visa and others have driven payment technology for years, it is still possible that the mobile wallet opportunity may be capitalized on elsewhere in the industry, leaving credit card providers out of the loop. However, that doesn't look likely right now.
GROWTH AND INCOME.
Wells Fargo & Company
Ticker symbol: WFC (NYSE) S&P rating: AA- Value Line financial strength rating: A Current yield: 0.6%
Wells Fargo & Company is a diversified financial services company, providing banking, insurance, investments, mortgages, and consumer finance from more than 11,000 offices and other distribution channels across North America.
The business is divided into three segments. First and largest is Community Banking, which provides services for consumers and small businesses in thirty-nine states and mortgage services in all fifty states through a combination of branches, ATMs, and online services. Wholesale Banking provides commercial banking, capital markets, leasing, and other financing services to larger corporations. Wealth, Brokerage and Retirement provides financial advisory and investment management services to individuals.
As of late 2010, Wells Fargo had $1.2 trillion in a.s.sets, loans of $730 billion, deposits of $814 billion, and a market cap of $149 billion. Based on a.s.sets, they are the fourth largest bank holding company in the United States. They have 267,000 employees, or "team members," as they prefer to call them.
With the addition of Wachovia, WFC's profile in the industry has changed considerably. Here are some of the revised industry rankings for Wells Fargo as of December 31, 2009: #1 in banking stores #1 in small business lending #1 in residential mortgage lending #1 in retail banking deposits #1 in used car lending #1 in preferred stock underwriting #1 in SBA 7(a) lending in dollars #1 in lending for small businesses #2 in annuity distribution #2 in debit cards #2 in U.S. deposits #2 in mortgage servicing
Financial Highlights, Fiscal Year 2010
The rebound started in FY2009 after the company completed one of the worst quarters in its history in Q4 FY2008, with an $.84 per share loss for that quarter and a paltry $0.70 per share in income for that year. FY2009 saw a rebound to a per share net of $1.75, still not up to pre-bust levels, but not so bad. FY2010 saw that rebound continue, with a reported $2.21 in earnings per share. Revenues were down slightly, reflecting a deliberate contraction in loans outstanding, and mandated and voluntary reductions in certain fees being charged. The company also reduced loan loss reserves to $16 billion from $21.7 billion in 2009, still about seven times levels retained in 2007.
Reasons to Buy
Last year we recognized Wells for their (relatively) conservative positions and cautious behaviors during the mortgage free-for-all. They had less exposure overall than most and were able to spot trouble earlier than many others. As a result, we're looking at a bank that today is in far better shape than many of its peers. Is it perfect? Certainly not. Wells, especially through its Wachovia foray, still has considerable exposure to real estate and bad mortgages, and there are few times this will abate soon. Based on what's happened in the past four years, it's hard to put any bank or financial services firm on the 100 Best Stocks list, but we'll go with this one as the obvious (to us, anyway) best of the bunch. That said, the company has proven itself to be able to manage through such adversity and still keep a solid public image. The company has a solid brand reputation and value (number two worldwide according to a BrandFinance study). The company is usually quick to recognize and deal with bad loans and bad decisions. Especially as the macroeconomic environment improves, we think WFC is well positioned to take advantage.
As recently as 2008, the company paid a healthy $1.30 dividend, which would have been about 60 percent of earnings. The financial crisis, TARP fund utilization, and other factors caused Wells to reduce the payout to $.20 per share, which is only about 9 percent of current earnings. The company wants to boost the payout but must clear the action with the Federal Reserve; a boost to prerecession levels would obviously be good for shareholders.
Reasons for Caution
"Headline risk" continues to abound in the banking industry. Any sign of trouble on the mortgage front will obviously hurt. Wells has been at the center of a legal battle over the validity of foreclosures and supporting doc.u.ments. The company has been profiting from the difference between retail and wholesale interest rates, but if wholesale interest rates, i.e., Fed funds and commercial paper, start to rise, the profit recovery could be jeopardized. The company issued about 500 million shares to build equity, and this and other moves have grown share counts from 3.3 billion to 5.2 billion in three years, jeopardizing dividend increases and potentially reducing shareholder value. While Wells is the best of a bad bunch, there are other companies in other industries that will foster better sleep at night.
Appendix A: Performance a.n.a.lysis: 100 Best Stocks You Can Buy 2011
ONE YEAR GAIN/LOSS, APRIL 1, 2010APRIL 1, 2011
Appendix B: Dividend and Yield, 20112012, Sorted by Company
Appendix C: Dividend and Yield, 20112012, Sorted by Yield
About the Authors
Peter Sander (Granite Bay, CA) is an author, researcher, and consultant in the fields of personal finance, business, and location reference. He has written twenty seven books, including Value Investing for Dummies, The 100 Best Aggressive Stocks You Can Buy 2012, What to Do When the Economy Sucks, 101 Things Every American Should Know about Economics, and Cities Ranked & Rated. He is also the author of numerous articles and columns on investment strategies. He has an MBA from Indiana University and has completed Certified Financial Planner (CFP) education and examination requirements.
Scott Bobo (San Jose, CA) has a BS from Miami University in Electrical Engineering Technology. After beginning his career in the defense electronics industry and teaching at the University of Cincinnati, he moved on to the computer and semiconductor industries in California, specializing in audio and applications engineering in a twenty-plus year career. Scott continues to teach, write, and consult on technology issues for private and corporate clients.