(By Rich Bieglmeier) Yesterday, Goldman Sachs upgraded shares of Visa (V) from a "buy" rating to a "conviction buy" rating while upping the price target to $188.00 from $160.00. The change in potential price-tags translates to 16.45% upside as we type.
Goldman named Visa their number 1 pick for 2013 in the IT-services sector saying the credit card company "is well positioned at the intersection of international growth and multi-channel payments convergence, which we believe remain two underappreciated drivers that can power faster transaction volume growth."
On the convincing news, Visa shares gained 1.52 % on the day.
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Based on V's historical valuations, Goldman is going to need to be right about "underappreciated drivers" powering "faster transaction volume growth." On a price-to-book basis, the business services company currently trades at its five-year high of 4.72 times book compared to the average of 2.90.
On the price-to-sales (P/S) front, Visa is valued well ahead of its five-year average of 9.07 with a P/S ratio of 12.57, which is closing in on the five year high of 15.89. The company's nosebleed price-to-earnings (P/E) ratio of 51.22 is dizzying enough; however, in the last five years the P/E peaked at 91.58 with an average of 39.58.
Relative to its peer group, V trades at a premium on a P/S and trailing 12 month P/E, as well. The average P/E for American Express Company (AXP), Discover Financial Services (DFS), and Mastercard Incorporated (MA) is 17.94. Meanwhile, Visa is expected to grow earnings by 17.30, versus 6.8% for AXP, a 2.2% decline for DFS, and 17.6% for MA. Clearly, Visa deserves a premium on this front, but in our view, its projected growth rate barely warrants a forward P/E of 19.24.
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Visa's P/S swallows the average for our three peers, coming in at 10.23 times sales, which stands twice as tall as the average of 4.48. We don't see the same exaggerated valuations based on P/B as the triplet of peers trades for an average of 4.95 times book versus Visa's 4.72 as we already mentioned.
Overall, Visa's (V) current trend and steady climb higher suggests Goldman's price target is attainable; however, iStock is as uncomfortable as a 40 in 36 sized jeans with a forward P/E that's higher than the projected growth rate and current P/E higher than 50. Visa's projected growth rate that's on par with MA and substantially ahead of DFS and AXP warrants a premium over Discover and American Express, but no so much on Mastercard, which may prove to be the better value in our view.