Option Trade 
Visa Inc. (NYSE:V) Calls
Tuesday, October 24, 2017

** OPTION TRADE: Buy the V JAN 19 2018 110.000 CALL at approximately $2.60. Place a pre-determined sell at $5.20.

Also include a protective stop loss of $1.05.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey   

Headquartered in San Francisco, CA, Visa Inc. (NYSE:V), a payments technology company that connects consumers, merchants, financial institutions, businesses, strategic partners and government entities to electronic payments, will report its fiscal fourth-quarter results tomorrow, October 25. The company will post its quarterly numbers before the market open, with the consensus calling for earnings of $0.86 per share. During the same period last year the company earned $0.78.

Short interest has decreased by 17.5% since the company's last earnings release while the stock has drifted higher by 8.0% from its open following the earnings release to be 14.1% above its 200 day moving average of $94.30. Overall earnings estimates have been revised higher since the company's last earnings release.

Improvements in the overall economy, coupled with slowly rising interest rates have resulted in bullish sentiment on Wall Street for credit card companies. Visa stock is trading just shy of a record high, which has pushed the P/E ratio up to 40.0. The multiple is pretty much in line with Mastercard (MA), so the valuation is not a great concern, and with Visa expected to grow earnings by 17.8% during the current year, and by 18.9% next year, there is plenty of reason to remain bullish on the stock’s outlook.

The company has topped estimates on the bottom line the last two quarters, while sales have been better than expected for four straight quarters. Wall Street expects another earnings beat, with a whisper number of $0.88 on the stock, which is two pennies above the consensus.

V’s stock performance over the past nine and a half years can be observed on the graph below; the Visa's nearly-decade long run has produced much better results than the broad market (SPY) with very little choppiness compared to what one might expect given the robust 25% annualized returns.

V has been a better performer than the efficient, diversified broad equities market. Throughout the whole decade, taking into consideration for the bear period of March 2008 to February 2009, the correlation between the weekly returns of V and the S&P 500 has been relatively low, at 0.62.

No payment card company approaches Visa's power, reach, and potential. As of the end of 2016, there were roughly 335 million Visa cards in circulation, according to WalletHub.

Visa stock has appreciated 34.9% on the year.

Visa’s 50 day moving average is $105.64 and its 200-day moving average is $98.12. The company has a market capitalization of $246.07 billion, a PE ratio of 40.02 and a beta of 0.93. Visa has a 52-week low of $75.17 and a 52-week high of $109.26.

Influencing Factors

The macro environment is still highly favorable to Visa. Not only does the global economy continue to be moderately strong, the shift in payment methods, from cash and checks to plastic and electronic, is still incipient in many global markets.

Also, secular trends favoring e-commerce transactions (which are rarely settled in hard currency and usually offer better fees for payment platforms) plus the development of new markets (e.g. peer-to-peer), and the winds seem to be blowing in Visa's favor.

V continues to trade at attractive multiples on a forward P/E basis, the 27x ratio might seem rich to some, but once the healthy long-term earnings growth expectations of +17% are factored in, V becomes the least expensive stock in the space, with a forward PEG of 1.5x looking relatively de-risked.

The company's Q3 saw it blow past estimates for both revenue and adjusted net profit, growing both by 26% on a year-over-year basis. These line items came in at $4.57 billion and $2.06 billion, respectively.

Visa Inc. 's V fiscal fourth-quarter results are expected to benefit from Payments volumes - one of the key revenue drivers set to surge on strength in India, the United States, Russia, Mexico and Australia. The Consensus Estimate for Payments volume from the Asia-Pacific is $437 billion, up 8.7% year over year.

The U.S. dollar has weakened this year, which is likely to drive more volume, particularly inbound. Also, improved spending trends in the global economy and the acquisition of Visa Europe should support overall Payments volumes. The Consensus Estimate for the same is pegged at $1,967 billion, up a good 20% year over year.

Visa's fourth-quarter fiscal 2017 earnings are likely to reflect solid revenue growth led by factors such as increased spending as the economy continues to grow and shift toward spending on cards and increased pricing. These factors will likely push up International Transaction Revenues. 

Growth in processed transaction is likely to push up Data Processing fees. The Consensus Estimate for the same is $2 billion, up 20% year over year. 

Also, lower-than-expected incentives must have aided margins, as Visa has slightly delayed moving some European clients to an incentive structure.

Meanwhile, Visa has its own efforts going in the digital-payments space, particularly with Visa Checkout. And it's done a good job partnering with, and even investing in, nominal rivals such as PayPal Holdings and Square.

A moderation in the exchange drag will also aid margins. 

The company has accelerated share buyback activity to offset the equity dilution from the Visa Europe transaction. Increased share buyback will provide an added shield to its bottom line.

Analysts and Hedge Funds Opinions

William Blair issued their Q1 2018 earnings per share (EPS) estimates for shares of Visa in a research report issued to clients and investors on Tuesday. William Blair analyst R. Napoli anticipates that the credit-card processor will post earnings of $0.93 per share for the quarter. William Blair also issued estimates for Visa’s Q2 2018 earnings at $0.97 EPS, Q3 2018 earnings at $1.02 EPS, Q4 2018 earnings at $1.08 EPS and FY2019 earnings at $4.63 EPS.

Also, Stephens began coverage on shares of Visa Inc. in a research report published on Friday. The firm issued an overweight rating and a $125.00 price target on the credit-card processor’s stock.

As well, Wells Fargo & Co upgraded Visa from a “market perform” rating to an “outperform” rating and increased their price objective for the company from $107.01 to $120.00 in a research report on Tuesday, October 10th.

Several other analysts have also recently commented on the company…..

  • UBS AG reiterated an “overweight” rating on shares of Visa in a research report on Thursday, August 24th. Deutsche Bank AG increased their price objective on Visa from $124.00 to $150.00 and gave the company a “buy” rating in a research report on Monday, July 10th.
  • Barclays PLC increased their price objective on Visa from $114.00 to $123.00 and gave the company an “overweight” rating in a research report on Wednesday.
  • Mizuho reissued a buy rating and set a $115.00 price target on shares of Visa in a research note on Thursday.
  • Zacks Investment Research raised Visa from a hold rating to a buy rating and set a $117.00 price target for the company in a research note on Tuesday, September 19th.
  • BidaskClub raised Visa from a buy rating to a strong-buy rating in a research note on Thursday, August 10th.
  • Finally, Nomura increased their price objective on Visa from $105.00 to $120.00 and gave the company a “buy” rating in a research report on Friday, July 21st.

Two equities research analysts have rated the stock with a hold rating, thirty-one have assigned a buy rating and one has assigned a strong buy rating to the company. The stock presently has an average rating of “Buy” and a consensus target price of $111.86.

Harvey’s Options Volatility Indicator


As the top credit card processor in a world rapidly moving away from cash to alternatives like plastic, the company is posting strong growth in all the right areas.

Visa could very well continue to see the value of its equity appreciate rapidly, in an efficient way (i.e. high risk-adjusted performance) and with low downside risk relative to the upside potential.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

** OPTION TRADE: Buy the V JAN 19 2018 110.000 CALL at approximately $2.60. Place a pre-determined sell at $5.20.

Also include a protective stop loss of $1.05.

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