Monday, 2 November 2015

Establishing levels for Visa and Church & Dwight

A few US earnings which caught my eye today.

First Visa.  I listed to the conference call and from the comments made on the quarter/FY noted:

Full year constant FX 18% EPS, 16% $ denominated

11% last 2 years constant dollars in payment growth.  Expect uplift next year due to US growth

Second quarter lap easier comparisons

H2 macro cross-border flows important, note some difficulties in H1

Low end of mid-teens range EPS 16e – noting tax, FX drag

‘the key underlying drivers to our business remain very healthy’

'we remain as bullish as we always have been on our structural trends’

Which all sounds fine...albeit Visa's high teen EV/ebit rating factors in quite a lot of structural excitement...and (of course) what a performer it has been over the last three years: 

However the main excitement - and maybe why the shares are down 3.5% as I write - is the purchase of Visa Europe.  Remember, they didn't own this part of their network as per a recent story in The Financial Times:

 Visa Inc is days away from buying its European sister company in a $22 billion deal that will provide a multibillion-dollar payday for some of the UK’s largest banks.
Speculation grew last night that the California-based credit card and payments company could announce the takeover next Monday alongside its fourth-quarter results, normally published in late October.
The buyout of Visa Europe has been expected for several months and Barclays, the company’s biggest shareholder, is expected to make more than £1 billion from the deal, while Lloyds Banking Group and Royal Bank of Scotland will receive smaller sums.
Another beneficiary of the merger will be the two private equity firms behind the recent flotation of Worldpay, the payments processing company.
Advent International and Bain Capital will receive 90 per cent of the money due to Worldpay for its share in Visa, which is expected to be valued at more than £800 million.

So does the deal stack up?  Here in summary is how I saw it on Twitter:

So.. & : paying 10-11% max of mkt cap for 5% bump in earnings but 20% bump in cards, 12%+ in rev (1/2) 
No surprises don't see it accretive until '17 but synergies over time surely high. Even if Europe slower growth, gut feel fine deal (2/2)

Again a few further notes from the conference call fleshes out the deal rationale a little further:

Full integration by 2020, highest savings via technology integration

Want Visa Europe operating margins to be ultimately the same as the rest of the Visa group

X1.5 ND:ebitda post the deal, want to pull back to x1.1-1.5 over time

‘could have used offshore cash to help close this transaction’, sounds as if will use debt offering to fund offering

Don’t want to offset flexibility etc.

‘cross border payment is hugely value added’

Overall I like this deal as it makes perfect sense to me and I believe could add a lot of value over time for Visa shareholders.  Visa shares below US$70 (currently US$74s) would still be a full old rating but that is a round numbers level that my pension fund could well be interested in this strong franchise business.  That's my flag level. 

I also reviewed a stock I have not appraised on Financial Orbit before: Church & Dwight:

Listening to conf call...and learning far too much about 'premium cat litter'. Impressive co...& valuation!

The reason I say an impressive company is derived from pacing through their 'Back to school' conference presentation of the early autumn where they fleshed out some of the positioning and impact of the consumer brand names noted above.  For example: 

Again, another impressive returns compounder over time as shown by the multi-year chart:

The value investor in me of course wants a compelling value entry point.  If I screw my eyes up and roll the numbers forward a year or so the EV/ebit falls below x16 at around a US$80 share price - as shown above a level where perhaps there has been some technical support during 2015.  That's my flag level. 

Two interesting thematic/structural stocks...and two flag levels.  

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