Visa, It’s Everywhere You Want to Be

February 25, 2008

Today, Visa revealed terms for an impending IPO, first announced last November in a registration statement filed with the SEC. Visa is the largest credit card company in the US and operates the world’s largest retail electronic payments network.

Visa’s IPO Terms

Visa plans to offer 406 million shares for $37-$42, and will trade on the New York Stock Exchange under the symbol “V” [1]. While an official IPO date has not been announced, IPO researchers expect trading to begin on March 20.

The IPO Market

The number of US IPOs priced this year has declined 49% from the number priced at this time a year ago [2], a possible sign that companies expect capital is no longer as freeflowing as before.

Last year’s largest deals were issued by financial firms including Blackstone Group (BX), Interactive Brokers (IBKR), and Och-Ziff (OZM) Capital Management. Demand was strong at first, but after the initial IPO “pop”, the majority of the financial companies ended up with negative returns by the end of the year.

MasterCard (MA) had its IPO back in May 2006, and has had a 400% return since then. MasterCard had a nearly 100% return in the past year. It has consistently beat earnings estimates since IPO and is expected to continue outperforming the business services industry. This has been possible in the terrible credit market because MasterCard provides credit card services and is not an actual credit lender.

Visa, the company

Visa, like MasterCard, derives its revenue from providing processing services to merchants and banks. By using bank issues, Visa does not profit from the interest paid by cardholders, but this also isolates it from debt defaults. Thus, the revenues of card service providers depend largely on consumer spending.

Visa did indeed see a 33% rise in revenue in 2007, although it recorded a loss due to litigation settlements with American Express and Discover.

Life Takes Visa

It seems inopportune for Visa to be offering an IPO at a time when consumer credit is rapidly crunching. What’s the hurry?

It’s likely that the banks invested in Visa are looking for a big pile of cash to help ease the credit crisis. If Visa does indeed raise the $17 billion it is hoping for, this would be good news for underwriters JPMorgan Chase (JPM) and Goldman Sachs (GS). Citigroup (C) and Bank of America (BAC) are also shareholders.

Visa may also be pushing for an IPO to cover litigation costs after a number of recent lawsuits.

I expect that Visa will underestimate their initial pricing to gain investors’ confidence given uncertain times. And, even though consumers will be cutting back on unnecessary spending, they will probably increase their use of credit cards for the essentials. Visa is also the official sponsor of the 2008 Olympic Games. Paired with this visibility, Visa may be in for a good run-up.

1. Visa SEC filing
2. Renaissance Capital IPO Research


Basics: Be Aware of Dates

September 20, 2007

Whether you’re a casual investor or an active investor, you should do occasional research about the companies that you own. It’s fine to keep up with every major news item that comes out about your company, but you should at least be aware of three key dates (listed below) and make appropriate decisions.

1) Earnings Reports Release Date

Much volatility does occur right after the release of quarterly earnings. I like to use Google Finance to find the dates that companies release their earnings under “Events”. Then if you use Google Calendar, you can conveniently add the earning release date to your calendar of events so you don’t forget about it. If you believe that a company will not meet analyst expectations or that it will be hard to maintain a level of growth in the current economy, it may be wise to sell before the earning release. On the other hand, if you notice that a company has high cash flow, low debt/equity ratio, and has a history of beating expectations, then it might be good to wait for exceptional earnings that will surprise investors and propel your stock even higher.

2) Dividend Dates

– Be aware of how often your stock pays dividends. Stocks don’t pay dividends like banks pay you interest on a monthly basis. General Electric (GE) pays dividends four times a year while China Mobile (CHL) pays dividends twice a year.

– Know when the ex dividend date is. If you aren’t an owner on a dividend paying stock before the ex dividend date, then you are not entitled to the dividend for a particular period. The payable date (dividend date) is usually a week or two after the ex dividend date so that dividend paying companies have adequate time to ensure investors that are entitled to the dividend are paid.

– Real World Example on how to miss a dividend payment:
Let’s look at JP Morgan (JPM) that pays dividends four times a year. Say you bought JPM on April 4, 2007 (one day after the ex dividend date), then you are not entitled to the .34/share dividend. Even if you bought this financial holding company on April 3, the ex dividend date, you are still not entitled to the dividend. Therefore you would have to wait until the next ex dividend date on July 3, 2007 to profit from a .38/share dividend.

3) Taxes on Short Term & Long Term Capital Gains

The tax rate on short term capital gains and long term capitals gains are different and generally apply more to long term investors more than short term investors. Short term capital gains are stock investments that are held less than one year and are taxed as ordinary income. Long term capital gains are stock investments held more than a year and taxed at a rate of:

a) 5% for the 10% and 15% tax brackets
b) 15% for the 25% and higher tax brackets

If you are near a holding period of one year and you think that the stock is going to trade flat, then just wait it out and take advantage of the long term capital gain tax benefit. If you are a few months away from the one year holding period and you believe that the stock will drop significantly, it may not be worth saving 5-15% off your capital gains. Remember, locking in a 15% gain on your investment is better than watching your stock fall below the price you paid and incurring a net loss.
Regardless of how you invest, it would be wise to be aware of earning release dates, dividend dates, and the cutoff date for a short term capital gain tax to become a long term capital gain tax. This is a major step to become a well informed investor.

Keep Money in the Banks

August 17, 2007

The stock market lately has been rocky and extremely volatile. A lot of investors are panicking and realizing that the market cannot continue an upward trend forever. In the last month, investors have experienced a 10% correction in the Dow Jones from a July 19th high of 14,000 to the current value of 12,845.78. Today, the Dow Jones spiked down more than 300-points midday, only to close down about 15 points. Worries about the subprime mortgage’s economic effect, Countrywide Financial’s (CFC) credit crunch, and a slowdown of consumer spending have affected the mind set of those on Wall Street.

For those investors that can’t handle the financial roller coaster ride with plenty of bumps, the best thing to do would be to put your money in the bank and collect some interest. On the other hand, I believe that instead of putting your money into an actual bank down the street from wherever you live, invest it in bank stocks. Some bank stocks that pay handsome dividends include Bank of America (BAC) at 5.14%, Citigroup (C) at 4.54%, Wachovia (WB) at 4.69%, JP Morgan (JPM) at 3.34%, and Wells Fargo (WFC) @ 3.50%. On top of their dividends, a few of these stocks are at the lower end of their 52 week range. I personally own Wachovia and am a big fan of both Wachovia and Bank of America. These are stable companies that will pay off a dividend, will not fluctuate as much as other sectors, and may be able to weather another 5-10% downward correction in the market. If the economy/market turns sour sooner than later, you may likely see the Fed take decisive action and trim interest rates which will be a big boost for the banking sector.

Don’t be surprised with another 600-800 point drop in the market, but these bank stocks would be a good outlet to invest your money until you see more attractive prices in the market later this year.