In short, MasterCard offers a limited risk, open-loop business model, which makes it a solid long-term holding. MasterCard offers a strong balance sheet with a solid cash flow. However, in the near-term, MasterCard may be trading in a tight range as it consolidates. Conservative investors may want to establish a long-term position after pullbacks.
Visa Inc (NYSE:V)
Visa Inc (NYSE:V), with a market cap of $108.93 billion, is a global payments technology company, enabling customers to use digital currency instead of check and cash. Visa Inc (NYSE:V) operates processing networks, called VisaNet, and an open-loop payment networks. Visa generates revenue by charging its clients different fees based on the dollar volume and the number of transactions.
Warren Buffett’s portfolio currently holds 1,555,459 shares of Visa Inc (NYSE:V). However, 524,200 shares and 785,349 shares were sold by Buffett in the second and third quarters of 2012, respectively.
On March 18, 2013, BNP Paribas initiated coverage on Visa with a hold rating and a price target of $166.00. Analysts currently have a mean target price of $175.03 for Visa, suggesting 6.24% upside potential. Analysts, on average, are estimating an EPS of $1.81 with revenue of $2.85 billion for the current quarter ending in March, 2013. In the last four quarters, Visa had four positive earnings surprises. Visa is expected to report its second quarter 2013 earnings on May 1.
Fundamentally, Visa has higher revenue growth (three year average) of 14.7 than the industry average of 5.5. However, Visa has a lower operating margin of 21.6% and a slightly higher net margin of 22.5%, compared to the industry averages of 43.0% and 21.2%, respectively. Visa also generates a lower ROE of 8.8 compared to the average of 16.7. Visa has a healthy balance sheet and generates strong cash flow. From a valuation perspective, Visa’s P/E, P/B, and P/S of 65.8, 4.8, and 14.8, respectively, are all above the industry averages of 29.9, 3.9, and 5.0. Visa’s P/E is also higher than its 5 year average P/E of 46.6. Visa’s Forward P/E of 19.1 is also higher than the S&P 500’s average of 14.3.
In short, Visa remains one of the most recognized brands in the world. Visa’s business model is simple, and the company makes money whenever a Visa card is swiped. Despite its solid cash flow and a zero debt balance sheet, Visa may be currently overvalued. Investors may want to establish a long-term position after any pullbacks. Investors can also consider leveraging options strategies to acquire Visa stocks at a lower price, such as credit put option spread strategy.
Bottom line
While each of the above companies offers a simple, easy-to-understood business model with a globally recognized brand, MasterCard and Visa offer faster growth while American Express provides a cheaper free cash flow. Any major pullback would be a great buying opportunity for all three stocks. However, investors are recommended to do their own due diligence and research before making any trading or investment decisions. All of the above stocks may not be suitable for conservative investors seeking stability or income.
The article Buy these 3 Buffett Financial Stocks on a Pullback originally appeared on Fool.com is written by Nick Chiu.
