The investing public should get an idea about the performance of the payments industry as the earnings report on Visa (NYSE:V) comes out. The world’s largest payments processor will report its third-quarter earnings on Tuesday, July 23rd after the bell. However, expectations will probably run as high as Visa stock.
As of last year, Visa controlled about 61.5% of the payment network market in the United States. Consequently, the stock has moved steadily throughout the year. However, given the valuation, the market appears to have fully priced in the market share and earnings growth of V stock.
Earnings and Revenue Continue to Rise
For the quarter ending on June 30th, analysts predict Visa earnings of $1.32 per share. Should this hold, that will represent a 10% increase from the same quarter last year, when profits came in at $1.20 per share. Wall Street also projects revenues of $5.7 billion, 8.8% more than the $5.24 billion the company brought in during the third quarter of 2018.
Visa stock has remained in a fortuitous position for some time. The demand for Visa’s services continues to increase profits at double-digit rates as society becomes increasingly cashless.
Visa Stock Is Expensive
Those who hoped to buy on a dip have seen few opportunities. Visa stock fell along with the market, falling to a low of $121.60 per share on December 24th. Since then, it has moved steadily higher, climbing almost 50% since the Christmas Eve bottom. The current price of just over $180 per share comes very close to the all-time high on V stock.
Unfortunately for new investors, the current price of Visa stock reflects this growth potential. The forward price-to-earnings ratio now exceeds 29. Wall Street believes that earnings will grow by 16.5% this year and 15.6% in 2020. Consequently, one can understand why V stock is not cheap.
Visa stock appears expensive in more ways than one. Many at InvestorPlace seem to agree. Dana Blankenhorn says, “it’s time to take profits.” Luke Lango calls it a “long-term winner,” but says it is “not worthy of paying $180 per share.” Even V stock bull Tom Taulli admitted valuations and pressure to reduce fees could undermine the case for Visa.
These double-digit growth rates have existed for some time. This has helped the company fund ten straight years of dividend increases. However, the payout now stands at $1 per year. This takes the yield to only around to only 0.55%. That does not compare well to the average dividend return for the S&P 500, which currently stands at just under 1.9%.
In fairness, investors seem to get what they pay for in this industry. Mastercard (NYSE:MA) trades at a forward P/E ratio of 31, a bit above Visa’s multiple. However, analysts believe MA will post higher profit growth numbers than Visa.
Some investors might prefer paying about 14 times forward earnings for American Express (NYSE:AXP). However, AXP stock barely exceeds 10% on profit growth. One can say the same about Discover Financial (NYSE:DFS). DFS stock trades at 8.7x forward earnings. However, Wall Street believes profit growth will fall below 10% after this year.
Should I Buy Visa Stock Before Earnings?
Despite the success of the company, investors should probably avoid Visa stock going into earnings. Without question, Visa runs the largest payment network. Moreover, thanks to the growing popularity of e-commerce and cashless payment options, its massive size has not precluded double-digit profit growth.
However, at more than 29 times forward earnings, the current Visa stock price fully reflects both its value and growth. It will also account for the fact that the company will more than likely beat earnings.
For those determined to invest in this industry, I would choose Visa stock, but not right now. I would urge investors to wait for a correction or a bear market for the S&P 500. As long as the payments industry stays in a growth mode, only a significant decline in the overall market will offer the opportunity to buy V stock at a reasonable price.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.