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Author: Gahread Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 58  
Subject: Re: Buy or not to buy Date: 2/25/2008 8:41 AM
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I'm a relative newbie to investing, so maybe I'm doing this wrong. Looking at the financial statement Visa released, they have post-tax income of $424M on revenues of $1,488M. Revenue growth from Q4 06 to Q4 07 was 26.9%. Income growth over the same period was... erk. 70.3%?!

It looks like they managed to hold expenses to a near standstill while growing their income. I don't know how long they can continue that, but I like what I see!

What worries the heck out of me is that third column in the financial report. They had to settle a lawsuit with American Express for $1.9 Billion-with-a-B dollars in 2007. There's another one pending for Discover right now. Visa stands a good chance of getting absolutely hammered in 2008 and/or 2009 if Discover's lawsuit goes through.

Long-term the prospect is a a lot better. Mastercard's Q4 2007 revenue was $1,073M with post-tax earnings of $304M. That tells me that Visa might have a little more fat to cut, but they're not going to be able to go too much further. Revenue growth was similar to Visa. From 2000-2006, Visa's total transactions grew by 14% a year. Estimate for 2006-2012 is 11% yearly growth. Respectable, but not jaw-dropping. Figure in inflation-adjusted fee increases and cost-trimming, and I can see income rising *at a VERY off the cuff estimate* by 13-16% per year.

Here's where I start to get really fuzzy: Based on the sizes of the two companies, Visa's market cap should be in the range of $37.5B, *assuming Mastercard is fairly valued*. If the IPO is for $42 a share, it will have an initial market cap of $17B. Actual value of a share should be about $92. That depends entirely on whether or not Mastercard's current share price is a realistic reflection of how much the company is worth.

Visa will probably not be hitting the $200 range of Mastercard simply because they're selling 406 million shares as opposed to Mastercard's 131 million. That's a serious dilution of value.

My take is twofold: First, I need to do a LOT of studying of Mastercard's intrinsic value since Visa's business model and efficiency seems to be a direct parallel. Take that, use an appropriate multiplier for the difference in the size of the businesses, and you get Visa's actual price.

Second, whether it's worth buying or not right off the IPO depends on how this Discover lawsuit works out, and how much the stock pops between the IPO and when it's publicly available. Given a $92 estimated value and some very significant risk of taking a $2B hit sometime in 2008-2009, I'm not sure what price I'd be willing to pay.

As a short-term play, I do not like Visa. Not one bit. It could very easily pop to $100 or more, followed by serious dumping as a massive loss is realized in 2008. Ride that wave and I can see a 50% loss happening too easily.

As a long-term play, I'm going to try for a good stake. I'm not sure what the right price would be. Anything over $90 isn't going to happen. Under $45 and I'll bury all my liquid assets there.
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