Visa Inc. (V) February 17, 2017 - University of Iowa Inc. (V) February 17, 2017 ... transaction...

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie School of Management

Shen Shen [[email protected]]

Visa Inc. (V) February 17, 2017

Financial Services – Card Networks Stock Rating Buy

Investment Thesis Target Price $100-102 We recommend a BUY for Visa Inc. with a potential for 16% upside. Visa is an absolute market leader with high operating margins, operating in a rapidly expanding digital payments industry characterized by stable oligopolistic competition. Visa is aggressively pursuing both organic, through its own technological developments and collaborations with partners such as IBM and PayPal, and inorganic growth, through, for example, acquisitions of Visa Europe and CardinalCommerce. In addition, the accelerating push for a cashless society worldwide and steady growth of consumer purchasing power all bode well for Visa and boost our confidence in Visa’s capability to continue deliver solid long term value to shareholders. Drivers of Thesis

• The monthly personal consumption expenditures of U.S. consumers are rising at a CAGR of 2.35% and has attained an all-time high in December 2016. The world economic growth has also been boosted by the strong U.S. economy recovery. We expect Visa to ride the global economic growth wave and experience a CAGR of 8.76% in its total payments volume over the next five years.

• Visa’s strategic partnership with PayPal has eliminated what used to be a major source of disintermediation risk for Visa. Moreover, its collaboration with IBM certainly allows Visa to leap ahead of the competition in a “blue ocean” created by the Internet of Things.

• With the growing emphasis on digital payments security, Visa’s acquisition of CardinalCommerce demonstrates its commitment to offer its customers the most seamless payments experience and best protection against e-commerce frauds, thereby giving digital payments users and merchants an additional reason to choose Visa over its competitors.

Risks to Thesis

• Brexit has added much turbulence to the economic future of both the E.U. and U.K. and triggered significant fluctuations in currency exchange rates. Due to Visa’s recent acquisition of Visa Europe and its high dependence of the European market, these uncertainties could harm Visa’s financial performance.

• The U.S. dollar appreciation, if continued, will adversely affect the revenues and net income of Visa, whose current hedging programs are not adequately effective to shield Visa from exchange rate movements.

Henry Fund DCF $101.11 Henry Fund DDM $81.11 Relative Multiple $96.47 Price Data Current Price $87.46 52wk Range $73.25 – 92.05 Consensus 1yr Target $98.03 Key Statistics Market Cap (B) $205.39 Shares Outstanding (M) $1,871.00 Institutional Ownership 92.80% Two Year Beta 0.91 Dividend Yield 0.64% Est. 5yr Growth 16.50% Price/Earnings 24.30 Price/Earnings (FY1) 22.23 Price/Sales 13.24 Price/Book (mrq) 7.12 Profitability Operating Margin 66.46% Gross Margin 78.35% Return on Assets 9.36% Return on Equity 18.20%

Earnings Estimates Year 2014 2015 2016 2017E 2018E 2019E

EPS $2.16 $2.58 $2.49 $3.60 $3.93 $4.28

growth 13.67% 19.31% -3.49% 44.56% 9.28% 8.88%

12 Month Performance Company Description

Undertook one of the largest initial public offerings in history in 2008, Visa is unarguably the #1 retail digital payments network worldwide. Visa has 3.1 billion Visa cards in circulation globally as of June 30, 2016 and processed a total of $8.2 trillion payments volume for the fiscal year ended September 30, 2016. Aiming to be “the best way to pay and be paid for everyone, everywhere,” Visa offers its clients the transaction processing services through its world’s largest open-loop digital payments network known as VisaNet as well as other value-added products and services.

24.3

18.2 19.4

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35.3

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P/E ROE EV/EBITDA

V MA PYPL

Source: Yahoo Finance

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F M A M J J A S O N D J

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Source: Yahoo Finance

EXECUTIVE SUMMARY

Visa holds an unshakeable market-dominant position in the card network sector, owning 45.6% and 68.1% market share in the credit and debit card sectors respectively in 2016. Visa is a much larger network compared to its major competitors based on market capitalization and also greatly outperforms them in terms of operating profitability and efficiency. Therefore, we do not expect Visa to experience any serious threat from competitors and we assume the current market share of this industry to remain relatively stable in the foreseeable future.

Visa’s market leader position also stems from its pursuit of aggressive organic and inorganic growth strategies. For example, its recent collaboration with IBM that aims to transform all connected products into potential points of sale terminals has certainly created a blue ocean for the payments industry and allowed Visa to stay far ahead of the competition. Its acquisition of CardinalCommerce, which enables it to offer its customers the most seamless payments experience and best protection against e-commerce frauds, further gives digital payments users and merchants an additional reason to choose Visa over its competitors. Moreover, the ending of the long “frenemy” relationship between Visa and PayPal will certainly benefit Visa’s business.

The abovementioned strengths of Visa, together with the global secular shift to a cashless economy and strong economic growth worldwide, have boosted our confidence in Visa’s capability to continue deliver solid long term value to shareholders. Therefore, we recommend a buy for Visa Inc. with a potential for 16% upside.

COMPANY DESCRIPTION

With the corporate vision to be “the best way to pay and be paid for everyone, everywhere1,” Visa is unarguably the #1 retail digital payments network worldwide, with 3.1 billion Visa cards in circulation globally as of June 30, 2016 and having processed a total of $8.2 trillion payments volume for the fiscal year ended September 30, 2016 (refer to Figure 1). Undertook one of the largest initial public offerings in history in 20082, Visa currently provides fast and secure electronic payments solutions to consumers, businesses, financial institutions and government bodies spanning across more than 200 countries and territories.

Figure 1: Visa Network (* Total volume includes Europe for the fourth quarter)

Source: Visa Inc. 10K (2016)

Operating in a “four party model” consisting of merchants, acquirers, Visa and card issuers, Visa offers the parties the transaction processing services, which manage the interchange of value along the value chain through its world’s largest open-loop digital payments network known as VisaNet, as well as other value-added products and services.

Figure 2: Typical Transaction Processing Steps on VisaNet


Figure 2 demonstrates the typical transaction processing steps performed by Visa to complete the routing of information and value from consumers to businesses. The whole process mainly involves two parts, namely authorization and clearing and settlement.

The authorization process starts when an account holder presents his or her Visa-branded payments product to a merchant to pay for purchases. The merchant’s point of sale (POS) terminal (physical or virtual, such as in an eCommerce transaction) would then capture and transfer the business transaction information to the corresponding acquirer, who is the financial institution that allows the merchant to accept Visa payments, and the appropriate payments product issuing financial institution for authorization and approval. Final settlement would take place between the acquirer and issuer after the

transmission of a clearing message encrypting the sales draft information from the acquirer.

It is important to note that Visa neither issues payments products nor extends credit to Visa account holders. Therefore, it is indemnified against credit risk, thereby enabling Visa to concentrate on its three main revenue sources that will be discussed under the Revenue Drivers section.

Revenue Drivers

Visa has only one reportable segment, Payment Services, and its gross revenues mainly come from three sources: service revenues, data processing revenues and international transaction revenues. Figure 3 shows Visa’s fiscal year 2016 percentage decomposition of the three revenue streams.

Figure 3: Visa’s FY2016 Revenue Composition


Visa is paid service revenues by its issuer clients every time an account holder uses Visa-branded products. Therefore, this revenue stream is entirely dependent on total payments volume, which was growing at a CAGR of 7.70% over the past five-year period. The inclusion of transaction volume processed on Visa Europe’s networks during the fourth quarter Visa’s 2016 fiscal year has resulted in a huge rise of its total payments year-on-year growth rate from 6.94% in 2015 to 15.70% in 2016. In fact, Visa’s year-on-year growth rate of its fiscal fourth quarter total payments volume shoots up 43%, from the 4% growth speed in 2015 to 47% in 2016, after the full integration of Visa Europe into its financial statements. Since fiscal year 2017 will be the first full fiscal year for Visa to encompass Visa Europe activities in its financial statements, we expect to observe an even greater growth velocity in Visa’s payments

volume, with a year-on-year growth rate of 27%, in our first forecast year (refer to Figure 4).

Figure 4: Total Payments YOY Growth

Source: Visa Inc. 10K, Model Projections

Though this impact from the Visa Europe acquisition will subside in 2018, Visa’s recent acquisition of CardinalCommerce, its partnership with IBM and PayPal, as well as the globe’s continued transition into a cashless economy all bode well for Visa’s strong payments volume growth momentum going forward. Hence, we forecast this revenue driver and the resulting service revenues to expand at a CAGR of 8.76% and 3.58% respectively for the next five years (refer to Figure 5).

Figure 5: Total Payments Volume and Service Revenues


Data processing revenues are earned for Visa’s authorization, clearing, settlement, network access and other related support and maintenance services provided to its clients, and they are mainly driven by the amount of transactions processed on its VisaNet system. The transaction number is increasing at a CAGR of 9.29% over the past five years and has also experienced significant

upside impact from the acquisition of Visa Europe. The year-on-year growth rate of Visa processed transactions rises from 2015’s 9.19% to 17.18% in the fiscal year of 2016 while that of its fiscal fourth quarter processed volume surges 36%. Again, as demonstrated by Figure 6, we forecast the year-on-year percentage growth in the company’s total processed transactions to reach its peak of 27% in 2017 and then gradually fall to the level of 9.98% in 2021.

Figure 6: Total Processed Transactions YOY Growth


According to the Henry Fund model projections, Visa processed transactions will increase at a CAGR of 8.93% over the next five years, leading to its data processing revenues to rise from $7.6 billion in 2017 to $10 billion in 2021, translating to a CAGR of 5.67% (refer to Figure 7).

Figure 7: Total Processed Transactions and Data Processing Revenue


Visa’s international transaction revenues are derived from its cross-border payments processing services, where the financial institution issuer and merchant are located in different countries, and the resulting currency conversion

activities. Similarly, the prime driver of this revenue source is international payments volume. As clearly indicated by Figure 8, international markets have always been critical to Visa’s overall business performance, with international payments volume making up close to 50% of its total payments volume in 2016. As the Visa Europe deal will unquestionably further push up Visa’s international presence, this figure is forecasted to attain almost 68% in 2021.

Figure 8: International Payments Volume as % of Visa’s Total Payments Volume


The revenue driver is expanding at a CAGR of 8.83% over the past five years. Again, because of the Visa Europe acquisition, Visa has experienced a hike in its cross-border payments transaction volume’s year-on-year growth rate, from 4.19% in 2015 to 22.27% in 2016. Its fiscal fourth quarter processed volume soars from negative 2% to positive 91% in 2016. Coupled with the rapid developments of digital payments industry worldwide, especially in the developing markets, we forecast this growth rate to reach 70.12% in 2017 and slowly decrease to 9.67% in 2021 (refer to Figure 9).

Figure 9: International Payments Volume YOY Growth


Based on the Henry Fund model projections and as illustrated in Figure 10, we forecast Visa’s international payments volume and transaction fees to grow at a CAGR of 9.15% and 6.05% respectively for the next five years.

Figure 10: Total International Payments Volume and Transaction Fees


Management Change

Visa’s ex-CEO Charlie Scharf announced his decision on October 17, 2016 that he would resign from the company so as to spend more time with his family and would be passing control to Alfred F. Kelly, who is the ex-President of American Express and a Visa board member since 2014, effective December 1, 2016. During the four years under Charlie’s leadership, Visa has demonstrated extraordinary performance and its share price soared 137%. Visa stock plummeted 0.4% shortly after the management change announcement. However, considering the fact that Alfred is profoundly versed in the card networks industry and has deep knowledge of Visa as a company, as well as Visa’s strong market leader position, we do not expect this management change to have any significant impact on Visa’s performance in the near term.

RECENT DEVELOPMENTS

Visa and IBM Collaboration

The collaboration between Visa and IBM that was announced on February 16, 2017 in Munich, which housed the brand new IBM’s $200 million Watson Internet of Things (IoT) headquarters3, is determined to totally disrupt the payments industry. This collaboration will eventually allow IoT consumers to enjoy secure payments

experiences through each and every connected device, including even shoes and cars.

Under this initiative known as “The Genius of Things,” Visa and IBM will transform all connected products into potential points of sale (POS) terminals through IBM’s Watson IoT technology and offer customers the privilege to design their own customized Visa-embedded payments network, which takes into consideration of their special preferences and needs. As Visa’s Executive Vice President of Innovation and Strategic Partnerships, Jim McCarthy, puts it, “The Internet of Things is not only driving a more connected world, it’s changing the way we live, shop and pay by moving the point of sale to wherever the consumer wants it4.” The whole payments process will consist of the steps outlined in Figure 11.

Figure 11: IoT-Connected Devices Payment Process

Source: Visa Inc. 2017

As devices are beginning to get more and more connected, POS terminals will be everywhere around consumers. Scenarios whereby a driver is alerted by his or her car about car parts requiring replacement and completes the whole purchase process with simply a push of the button in the car are becoming a reality. Experts have forecasted that the IoT-connected devices, ranging from wearables and mobile phones to home appliances, will attain 50.1 billion worldwide by the end of 2020 as evidenced in Figure 12. Connected cars are also estimated to reach 380 million by 2021. Once infused with payments capabilities, these smart devices can now convert what used to be onetime payments to recurring revenue streams for retailers, which will in turn translate into a massive source of transaction volume and revenue for Visa.

Figure 12: IoT: Number of Connected Devices Worldwide

Source: Statista

This collaboration with IBM has certainly created a blue ocean for the payments industry and allowed Visa to stay far ahead of the competition. The program is to be developed over the next five years. As there are only around 6,000 IBM clients connected on its Watson IoT platform5, we do not expect the collaboration to have significant impact on Visa’s revenues yet. However, as the IoT’s adoption rate starts to pick up and the technology develops and matures, the earning potential of this newly-created payments sector will be enormous.

Acquisition of CardinalCommerce

Visa announced the agreement on December 1, 2016 to acquire CardinalCommerce and the deal is expected to close in Visa’s second fiscal quarter of 20176. CardinalCommerce is a pioneer and global leader in the e-commerce payments authentication industry. It possesses the widest authentication network around the globe and holds more than 63 patents. Financial terms of the transaction were not disclosed.

The digital commerce sector, characterized by aggressive competition among payments services providers, is booming. According to an annual survey by comScore and UPS, 2016 marks the first year in which more consumers are going online shopping instead of brick-and-mortar stores, with shoppers today make 51% of their purchases online7. As can be seen from Figure 13, global retail e-commerce sales are expected to grow at a CAGR of 21.26% till 2020. However, many studies have also proven that complicated and time-consuming digital checkouts, which sometimes deny legitimate consumers but grant access to credit card thieves, are suppressing transaction growth.

Therefore, only the payments provider who can offer its customers the most seamless payments experience and best protection against e-commerce frauds can eventually emerge as the winner in the competition. And such a move by Visa to acquire CardinalCommerce signifies Visa’s commitment to achieve this goal as well as its ambition to be the industry leader in the digital commerce sector.

Figure 13: Retail Ecommerce Sales Worldwide ($ in Trillions)

Source: eMarketer

CardinalCommerce leverages a 3D Secure technology under which financial institution issuers would authenticate online shoppers even before they are approved to perform an e-commerce transaction8. Consumers will no longer have to go through the hassle of inputting passwords as no passwords will be prompted until various other security determinants have indicated high possibilities of financial frauds, thereby making the whole digital checkout process much less intrusive to legitimate customers. Moreover, the 3D Secure technology will boost the acceptance level of Visa network among merchants, since the authentication responsibility and liability for fraud are now shifted from merchants to financial institution issuers. This acquisition also fits perfectly with Visa’s plan to enter the IoT sector explained earlier and provides the technology support needed to ensure Visa’s success.

Through its CyberSource merchant and acquirer enablement platform, Visa already supplies CardinalCommerce’s solutions to its clients even before the acquisition. After the acquisition, CardinalCommerce will operate as Visa’s wholly-owned subsidiary and

continue to serve its existing clients9. Detailed financial terms of the deal are not disclosed, so it would be difficult to accurately gauge the costs of the acquisition. However, we forecast this acquisition to greatly accelerate both the expansion of e-commerce industry, with improved authentication experiences translating into more rapid conversion rates and higher sales for businesses, and transaction volume and revenue growth of Visa.

Visa and PayPal Partnership

The new partnership between Visa and PayPal that was announced on July 21, 2016 finally marks the ending of their long history of a “frenemy” relationship. Being one of the most widely adopted digital payments mobile app in the world, PayPal allows its users to make digital payments through the debit/credit cards and/or bank accounts stored within the app. However, the recent years’ explosive growth of PayPal has always been criticized by Visa as having come at the expense of card networks because the mobile wallet giant would previously incentivize its users to link their wallets directly to bank accounts, thereby cutting Visa and other card networks out of the payments ecosystem all together. Fortunately, under this new agreement, PayPal will no longer steer users away from Visa, but will instead incorporate Visa-branded products’ images into its payments flows and simplify the process for both new and existing users to pay with Visa by presenting Visa “as a clear and equal payment option during enrollment and subsequent transactions.”10

It is estimated that, prior to this partnership, 50% of the total payments transactions on PayPal were processed directly through its users’ bank accounts. Of the other 50% of the volume transacted via card networks, Visa took half of it. With the signing of this agreement, we forecast Visa to have the potential to eventually capture half of PayPal’s total payments volume. That would translate to an additional $105 billion annual payments volume for Visa in 2017, in view of the fact that PayPal’s annual payments volume, which was growing at a CAGR of 18.73% over the past five years, has already attained $354.01 billion in 2016 (refer to Figure 14). With PayPal’s active account holders passing the 200 million mark, this new partnership will certainly generate significant jumps in Visa’s local payments volumes. Visa and PayPal are also currently working on a similar partnership targeting at international markets.

Figure 14: PayPal’s Annual Payments Volume

Source: Statista

Earnings Announcements

Visa announced its 2017 first fiscal quarter earnings on February 2, 2017. It has reported a total revenue of $4.5 billion and an earnings-per-share of 86 cents, beating analysts’ estimates on both metrics by $170 million and 8 cents respectively. Visa has actually outperformed analysts’ expectations consistently for the past 22 out of 24 quarters, which further heightens our confidence in Visa’s continued success. After the earnings announcements, Visa’s stock price mounts almost 5% to its record high of $86.08.

Based on the Henry Fund model projections, we forecast Visa’s revenues and earnings-per-share to grow at a CAGR of 4.23% and 6.40% respectively for the next five years till 2021. Figure 15 and 16 exhibit our projected total revenues and earnings-per-share of the company relative to the analyst estimates provided by FactSet, which are fairly in line with each other.

Figure 15: Projected Total Revenues VS Analysts’ Estimates

Source: Visa Inc. 10K, Model Projections, FactSet

Figure 16: Projected Earnings-per-Share VS Analysts’ Estimates

Source: Visa Inc. 10K, Model Projections, FactSet

INDUSTRY TRENDS

Emerging Markets

The severely underserved needs for financial services and the absence of an established banking infrastructure in many of the emerging markets are opening up huge opportunities for cashless payments service providers, and in turn the associated card networks, to rapidly enlarge their customer base. This is due to the fact that most of the potential customers there will have to incur practically no switching costs since the vast majority of them remain unclaimed.

Take India for example. Having a population exceeding 1.3 billion but credit card penetration rate of less than 2%, India certainly represents a market opportunity too immense to be neglected by card networks and digital payments industry players. The nation is expected to see its internet users more than double during the five-year period from 300 million in 2016 to about 650 million in 2020 and half of them are to regularly engage in digital payments activities, leading to a transaction volume of $500 billion at that time. Digital payments transactions are already growing at a CAGR of 30.38% (refer to Figure 17).

Visa should definitely take advantage of the Indian government’s efforts to promote a cashless Indian economy, which can be managed less costly, better serve the underbanked citizens and combat financial crimes. Take the Unified Payments Interface (UPI) launched by the Reserve Bank of India (RBI) in early 2016 for example. UPI is a platform that permits the participation of all kinds of payments service providers, including e-wallets and

payments banks. The elimination of the Know Your Customer (KYC) requirement for financial transactions less than $150 per month has also pushed for e-wallets’ mass adoption in India. Moreover, the surprise attack by India’s Prime Minister, Narendra Modi, on 8th November 2016 against “black money” and counterfeit currency has resulted in a shortage of cash, which will inevitably further drive Indians to digital alternatives.

Figure 17: Massive Growth in Digital Transactions

Source: FIBAC Productivity Survey 2015, RBI, IBA, BCG Analysis

Demographic Trend

The “Millennial Impact” has poised to further drive up the expansion of the cashless payments industry, which will successively accelerate the expansion of card network providers such as Visa. Millennials, who are in the age of 18 to 34 and have grown up surrounded by all kinds of high-tech gadgets, are demanding a new way to do payments activities. They emphasis on user experience in all aspects of their life, including payments experience. Therefore, digital payments technologies that provide users the privileges of immediacy, control and customization are gaining widespread usage among the generation. Such a trend is evidenced by the distribution of digital wallet users across age groups currently in the U.S., where 81% of the adopters are from the millennial generation (refer to Figure 18). As they gradually take over the workforce and their purchasing power improve, this generation of millennials will be more than ready to fully embrace the digital payments world.

Figure 18: Distribution of Digital Wallet Users in the United States as of June 2014, by Age Group

Source: Statista

MARKETS AND COMPETITION

Card Networks

The card network sector is the most important market that Visa is competing in. There are currently six major credit/debit card networks worldwide, namely Visa, MasterCard, UnionPay, American Express, Discover and JCB, with UnionPay and JCB being international players dominating Chinese and Japanese markets respectively (due to limited access to their financial information, we will focus our discussion mainly on Visa, MasterCard, American Express and Discover from now onwards). As can be observed from Figure 19 and 20, Visa is the absolute leader in both credit and debit card markets in 2016, owning 45.6% and 68.1% market share in the two markets respectively. However, it is critical to note that among the four major local card networks, Visa and MasterCard are operating an “open-loop” network, while American Express and Discover are administering a network characterized by its “closed-loop”.

Figure 19: Distribution of Credit Cards Worldwide by Purchase Transactions

Source: Nilson Report (2016)

Figure 20: Distribution of Debit Cards Worldwide by Purchase Transactions

Source: Nilson Report (2016)

Open-Loops

Consisting of customers, payments gateways, merchant processors, merchants, merchant acquirers and card issuers, open-loop networks neither issue payments products nor extend credit to account holders and generate revenues solely through transaction volumes. As the only other open-loop card network, MasterCard is essentially Visa’s most direct competitor industry-wide. Key financial performance metrics of the two companies are presented in Table 1.

Table 1 (Except for Market Cap, Total Assets and LT Growth Rate, all values are 5-year averages)

Visa MasterCard

Market Cap 204.02B 119.07B

Total Assets 64,035M 18,675M

Operating Margin

63.48 54.03

ROA 12.14 23.79

ROE 17.41 53.20

P/E 30.70 27.97

Receivables Turnover

8.06 4.22

Asset Turnover 0.31 0.63

Current Ratio 1.74 1.81

Total Debt/Total Assets

4.96 11.65

Total Debt/Total Equity

9.65 33.87

LT Growth Rate 16.5% 15.8% Source: Factset

As can be observed, Visa is a much larger network compared to MasterCard, holding a market capitalization nearly twice and total assets almost four times greater of

that of the latter. For profitability, Visa beats MasterCard in terms of operating margin, but has a lower ROA and ROE. This should not be a surprise to the market considering MasterCard’s balance sheet is only 30% the size of Visa’s, and Visa is constantly pursuing aggressive growth strategy such as the recent acquisition of Visa Europe and CardinalCommerce. It is therefore even more impressive for Visa to have such low leverage ratios compared to MasterCard. The market shares our view that Visa is clearly better positioned for future growth as evidenced by its higher P/E and LT growth rate. In conclusion, with Visa’s asset size as well as its outstanding profitability and efficiency level, we believe that Visa will continue to be the market leader in the open-loop network sector.

Closed-Loops

American Express and Discover are closed-loop networks, which, as opposed to open-loops, do not involve card issuers and/or acquirers as they themselves function as financial institution issuers and earn revenues via extending credit to clients. Even though they operate on a different business model from that of Visa, being the two of the four local card networks, their business performance is definitely significant enough to warrant close examination.

Table 2 (Except for Market Cap, Total Assets and LT Growth Rate, all values are 5-year averages)

Visa American Express

Discover

Market Cap 204.02B 72.16B 27.43B

Total Assets 64,035M 158.9B 92,308M

Operating Margin

63.48 22.31 51.97

ROA 12.14 3.30 2.90

ROE 17.41 26.23 22.40

P/E 30.70 15.40 11.39

Asset Turnover

0.31 0.22 0.12

Total Debt/Total Assets

4.96 36.65 27.05

Total Debt/Total Equity

9.65 289.75 208.57

LT Growth Rate

16.5% 8.2% 7.7%

Source: Factset

It is clear from Table 2 that Visa dominates both American Express and Discover in size by having a market capitalization that is more than double that of the latter two combined. Visa is also much more profitable in terms of operating margin and ROA. Its relatively poor performance on ROE is misleading in view of the extremely heavy debt structure of American Express and Discover. Again, the market is highly confident on the future development of Visa and has forecasted a high LT growth rate that is more than twice that of the two competitors. Accordingly, we do not expect Visa to experience any serious threat posed by American Express or Discover at least in the near future as its profitability, efficiency and market leader position are simply too strong to be shaken. Moreover, given their different revenue models, American Express and Discover also lack the incentive to engage in any fierce competition with Visa. Therefore, we assume the current market share of this industry to remain stable in the foreseeable future.

Digital Payments

As a payments service provider, Visa is also a player in the general digital payments industry. In addition to the traditional digital platforms such as PayPal, this industry is seeing a vast number of non-traditional financial services providers across diverse player categories rushing into the level field. They now include mobile device manufacturers like Samsung and Apple, technology giants like eBay, Google and Alibaba, and even commercial vendors like Walmart and Starbucks. However, it should be noted that, rather than enemies, these digital payments service providers are instead important complements to Visa due to the fact that they have to rely on card networks to transact funds. With the global mobile payments market forecasted to grow at a CAGR of 67.32% to reach $865.5 billion in 2021 as exhibited by Figure 21, the strategic partnerships formed between Visa and various digital platforms, such as PayPal and Apple Pay, will certainly accelerate the momentum of Visa’s growth and allow it to stay at the top of the game.

Figure 21: Transaction Value in the Mobile Payments Market (Worldwide)

Source: Statista

ECONOMIC OUTLOOK

Uncertainty Surrounding the Brexit

The eventual passing of the referendum in June 2016 that approved the withdrawal of the U.K. from the E.U. (commonly known as Brexit) has added much uncertainty and turbulence to the future of both the Europe and the payments companies whose revenues depend heavily on international, in particular European transaction activities. As can be observed from Figure 22, revenues earned from Visa’s cross-border payments transactions are contributing an increasing proportion of its total operating revenues, reaching 31% during the fiscal year of 2016 (Visa does not disclose its cross-border revenues earned specifically from its business operations in the U.K. and the E.U.). In fact, the stock price of Visa plummeted 4.1% while MasterCard’s fell 4.4% following the Brexit announcement11.

Figure 22: Revenues from Global Cross-Border Activities as % of Total Revenues

Source: Visa Inc. 10K

The potential depreciation of euro and pound against the U.S. dollar would inevitably reduce card networks’ non-U.S. earnings (refer to the section “Dollar Appreciation” for detailed discussions on the financial impacts inflicted by currency movements on Visa). The rollout of digital payments technologies, such as mobile wallets, is expected to slow down in the Europe lacking the attractiveness of a large single market. E-commerce growth may also be delayed due to possible inefficient cross-border distribution of physical products. Moreover, uncertainties over laws and regulations in the U.K. and rest of the Europe could potentially raise card networks’ operating costs. With the European region accounting for nearly 20% of the credit card purchase volume worldwide in 2013 (refer to Figure 23) and 23% of the global card payments transactions, the shockwaves to the payments industry will certainly be forceful.

Figure 23: Market Share of Credit Card Purchase Volume Worldwide in 2013 and 2023, by Region

Source: Statista

The timing of the Visa Europe acquisition by Visa now seems to be unfortunate. Visa may not be hit by the downsides immediately. However, as it gradually completes the full integration of Visa Europe, Visa may start to experience the negative impacts over time. If we assume that 20% of Visa’s total operating revenues will be generated from the European region and that there will be an approximate 3% blended appreciation of USD against EUR and GBP after the full integration, Visa could see a 60 basis point decline in earnings, equating to almost $0.01 in its quarterly EPS12.

Consumer Spending Power

Consumer spending power, a major driver of payments transaction volume and, in turn, Visa’s operating revenue, has seen steady growth over the past seven years13.

Boosted by the increasing per capita disposable personal income, which is growing at a CAGR of 3.72% over the past five years and has reached its record high in February 2017, as well as continuous wage growth at a CAGR of 5.63% since 2010 (refer to Figure 24 and 25), the monthly real personal consumption expenditures of the U.S. consumers are rising at a CAGR of 2.45% during the past seven-year period and has also attained an all-time high in December 2016 (refer to Figure 26).

Figure 24: The U.S. Disposable Personal Income

Source: The U.S. Bureau of Economic Analysis

Figure 25: Nominal Wage Growth

Source: The U.S. Bureau of Labor Statistics

Figure 26: Real Personal Consumption Expenditures

Source: The U.S. Bureau of Economic Analysis

Such a health growth of the consumer spending metric can be expected to be very well sustained in view of the accelerated U.S. economic growth as well as falling unemployment rate. Moreover, the newly-elected U.S. administration has put forward various fiscal stimulus proposals, including cuts in both corporate and personal income taxes and heavy investment in nationwide infrastructure14, with the goal to further stimulate U.S. economy and create jobs. This has fuelled optimism about the U.S. outlook among experts and incentivized the OECD to lift its forecast for the 2017 U.S. economic growth to 2.3% and for 2018 to achieve 3.0%, and to push that for the unemployment rate down to 4.5%15 (refer to Figure 27). In conclusion, the upside trends discussed should guarantee strong future performance from Visa.

Figure 27: National Unemployment Rate

Source: IBISWorld

Dollar Appreciation

The U.S. dollar is currently overvalued. As shown by Figure 28, the DXY dollar index is already close to 20% higher than the purchasing power parity (PPP) level, representing an appreciation of nearly 40% over the past six years. Similarly, the U.S. dollar is about 35% overvalued versus the yen and almost 15% relative to the euro16. The strong and rising U.S. dollar is adversely affecting the revenues and net income of many payments companies with significant international operations, since the revenues earned in local currencies now translate into much lower revenues denominated in the U.S. dollar. Take MasterCard for example. According to its Chief Financial Officer, Martina Hund-Mejean, “the strong dollar is expected to negatively impact (MasterCard’s) revenue growth by about 2% and net earnings by about 3% in 2017.”17

Figure 28: Percentage Overvaluation Based on Purchasing Power Parity VS Spot Exchange Rate

Source: Bloomberg & UBS (February 13, 2017)

It is very difficult to accurately predict future fluctuations of the dollar’s value. However, because of the high correlation between the Federal Reserve (Fed) interest rate and dollar’s value (refer to Figure 29) and the Fed’s forecast to raise interest rates three times in 201718, most experts agree with the consensus that the upward trend will persist at least in the near term. Moreover, the protectionist measures put forward by the new administration, such as the proposed 20% border-adjustment tax (BAT), are most likely to prolong dollar appreciation. Considering the critical importance of international transaction revenues to Visa’s overall financial performance as well as its acquisition of Visa Europe, the strengthening U.S. dollar deserves closer attention from the management. Unfortunately, the current hedging programs engaged by Visa are not adequately effective to shield Visa from exchange rate movements. For example, its total operating growth in fiscal 2016 was negatively impacted by 3% due to the fluctuations. Therefore, more powerful currency hedging strategies are required to protect Visa against growing uncertainties brought about by the Brexit and newly-elected Trump administration.

Figure 29: The Fed Funds Rate VS The Dollar Index

Source: McClellan Financial Publications

INVESTMENT POSITIVES

• Visa is an absolute market leader with high operating margins, operating in a rapidly expanding digital payments industry characterized by stable oligopolistic competition.

• The monthly personal consumption expenditures of U.S. consumers are rising at a CAGR of 2.35% and has attained an all-time high in December 2016. The world economic growth has also been boosted by the strong U.S. economy recovery. We expect Visa to ride the global economic growth wave and experience a CAGR of 8.76% in its total payments volume over the next five years.

• Visa’s strategic partnership with PayPal has eliminated what used to be a major source of disintermediation risk for Visa. Moreover, its collaboration with IBM certainly allows Visa to leap ahead of the competition in a “blue ocean” created by the Internet of Things.

• With the growing emphasis on digital payments security, Visa’s acquisition of CardinalCommerce demonstrates its commitment to offer its customers the most seamless payments experience and best protection against e-commerce frauds, thereby giving digital payments users and merchants an additional reason to choose Visa over its competitors.

INVESTMENT NEGATIVES

• Brexit has added much turbulence to the economic future of both the E.U. and U.K. and triggered significant fluctuations in currency exchange rates. Due to Visa’s recent acquisition of Visa Europe and its high dependence of the European market, these uncertainties could harm Visa’s financial performance.

• The U.S. dollar appreciation, if continued, will adversely affect the revenues and net income of Visa, whose current hedging programs are not adequately effective to shield Visa from exchange rate movements.

VALUATION

Discounted Cash Flow (DCF), Economic Profit (EP), Dividend Discount (DDM) and Relative Valuation (PEG) Models are employed to value Visa. They yield target stock prices of $101.11, $101.11, $81.11 and $96.47 respectively. DDM gives poor estimates because Visa is aggressively pursuing both organic and inorganic growth

strategies and we expect its NOPLAT growth to far outpace that of dividend. We also disregard the target stock price calculated from PEG despite the fact that it also suggests a buy rating for Visa. This is because none of the competitors analyzed are in the exactly same industry sector as Visa except for MasterCard, which is much smaller in size compared to Visa, thereby causing this valuation model to be insufficient to both account for Visa’s wide and profitable economic moat and reflect the long-term growth capability that we expect Visa to attain. Therefore, we believe that DCF and EP give the closest estimate of the current intrinsic value of the Visa stock.

Time Horizon: The Henry Fund valuation model constructed for Visa is built over a time horizon of five years. Visa has already completed its acquisition of Visa Europe in its fiscal 2016 fourth quarter and therefore, we expect growth stemming from the acquisition to be fully phased-in in 2017, before gradually stabilizing over the next four years till 2021.

Revenue Drivers: The year ended September 30, 2017 will be the first full fiscal year for Visa to include Visa Europe activities in its financial statements. Therefore, we expect significant hikes in Visa’s three major revenue drivers, especially the international transaction fee driver, in our first forecast year. Total payments, processed transactions and international payments volume year-on-year growth are forecasted to reach 27%, 27% and 83% in the fiscal year 2017 respectively. And these values will subsequently fall to averages of 13%, 12% and 15% accordingly over the next four forecasted periods. Adjustments for currency fluctuations are incorporated and are reflected by the generally lower revenue year-on-year growth rates across three revenue segments (16%, 21% and 35% for the fiscal year 2017, and averages of 6%, 8% and 8% respectively) as compared to that of payments volumes.

Operating Expenses: In view of Visa’s capital lightness and relatively stable historical cost structure, we forecast the operating expenses of Visa based on constant percentages of total net operating revenues over the projection period. For the depreciation and amortization expense account, we fix it as a stable percentage of property, equipment and technology, in line with historical trends.

Relative to Analyst Estimates: Based on the Henry Fund model projections, we forecast Visa’s revenues and earnings-per-share to grow at a CAGR of 4.23% and 6.40% respectively for the next five years till 2021. Our

projections and the estimates put forward by the analysts are fairly in line with each other.

CV Growth of NOPLAT: According to the Henry Fund model, we project a CV growth of NOPLAT of 3.82%. This is reasonable considering the fact that the world nominal GDP is forecasted by the IMF to grow at a rate of 5.38% in 2021 and that Visa should grow, in its steady state, at a lower velocity compared to the global economy. The world nominal GDP growth rate is an appropriate benchmark in this case because international markets have always been critical to Visa’s overall business performance, with international payments volume making up close to 50% of its total payments volume in 2016. As the Visa Europe deal will unquestionably further push up Visa’s international presence, this figure is forecasted to attain almost 68% in 2021.

Risk-Free Rate: Risk-free rate is the daily treasury yield curve rate of a U.S. 30-year bond on February 17, 2017.

Market Risk Premium: The market risk premium of 4.8% used is the Henry Fund consensus for 2017. We believe that this is an accurate reflection of the market risk going forward.

Beta: Beta is from Bloomberg average 2-year weekly data to take into consideration of Visa’s corporate structural change after its acquisition of Visa Europe.

Pre-Tax Cost of Debt: The pre-tax cost of debt is estimated based on Visa’s 4.30% senior notes that are publicly traded and due in December 2045.

Market Value of Debt: To derive the market value of debt, Visa’s operating leases, which represent off-balance sheet liabilities too significant to ignore, are included in the calculation.

KEYS TO MONITOR

In conclusion, we recommend a BUY for Visa with a potential for 16% upside. Visa is an absolute market leader with high operating margins, operating in a rapidly expanding digital payments industry characterized by stable oligopolistic competition. Visa is aggressively pursuing both organic, through its own technological developments and collaborations with partners such as IBM and PayPal, and inorganic growth, through, for example, acquisitions of Visa Europe and CardinalCommerce. In addition, the accelerating push for

a cashless society worldwide and steady growth of consumer purchasing power all bode well for Visa and boost our confidence in Visa’s capability to continue deliver solid long term value to shareholders.

However, there are several critical metrics that demand close monitoring in order to determine if our investment thesis remains on track.

• The U.S. and worldwide economic and payments transaction volume growth

• The U.S. Federal interest rates • The appreciation of the U.S. dollar • The economic and political environment of the

U.K. and E.U. • The ability of Visa to sign more partnership deals

with, for example, mobile wallets providers that encourage users to pay with Visa products

• The ability of Visa to continue to win large clients similar to USAA and Costco

• The momentum of Visa’s penetration in developing markets, such as China and India

• The adoption rate of non-cash payments technologies in developing markets

• The creation of synergy between Visa and its new CEO

• Financial terms of Visa’s acquisition of CardinalCommerce

• The creation of synergy between Visa and CardinalCommerce

REFERENCES

1. Visa Inc. 10K (2016) 2. Visa Inc. 10K (2015) 3. IBM And Visa Want You To Pay From Your Car; USA

Today; Edward C. Baig; February 16, 2017 4. Visa And IBM Collaborate To Turn Connected Devices

To Points Of Sale With IoT; Global Payments Intelligence; Alara Basul; February 17, 2017

5. IBM And Visa Collaborate To Create Potential Points Of Sale With Watson Internet Of Things; Daily News Egypt; February 22, 2017

6. Visa To Acquire CardinalCommerce To Secure And Accelerate Digital Commerce; NASDAQ; December 1, 2016

7. Consumers Are Now Doing Most Of Their Shopping Online; Fortune; Madeline Farber; June 8, 2016

8. Visa Shows Commitment To Online Authentication, Acquires CardinalCommerce; CardNotPresent.com; December 6, 2016

9. Visa To Acquire CardinalCommerce To Secure And Accelerate Digital Commerce; Business Wire; December 1, 2016

10. PayPal, Visa Declare Truce, Sign Digital Payments Partnership; Daphne Howland; July 22, 2016

11. Brexit Vote Bashes U.S. Payments Companies, Long-Term Effects Unclear; Jim Daly; June 24, 2016

12. ‘No Silver Lining’ For Visa, MasterCard From Brexit; Teresa Rivas; June 24, 2016

13. A Look At The Trends Affecting Holiday Spending, Impact On Credit Card Companies; Forbes; December 8, 2014

14. Global Economic Prospects; World Bank Group; January 2017

15. OECD Says Trump Tax And Spending Plans Will Boost Global Economy; Reuters; November 28, 2016

16. POTUS 45 – Investment Implications Of Likely Trump Administration Priorities; UBS; February 23, 2017

17. MasterCard Revenue Misses Estimates Hurt By Rebates, Stronger Dollar; Reuters; January 31, 2017

18. Fed Raises Rates For First Time In 2016, Anticipates 3 Increases In 2017; The Wall Street Journal; Harriet Torry; December 15, 2016

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

VISA INC.Revenue Decomposition

Fiscal Years Ending Sep. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021EService revenue driversPayments volume, total (in billions) 4,567 4,884 5,651 7,177 8,128 9,028 9,941 10,924 Total pmts. YOY Growth 8.82% 6.94% 15.70% 27.00% 13.25% 11.08% 10.11% 9.89%

Service revenue yield % (percentage of paymentvolume that translates into service revenue ) 0.127% 0.129% 0.119% 0.109% 0.101% 0.095% 0.090% 0.085%Service rev yield YOY growth -0.46% 1.66% -7.47% -8.80% -7.10% -5.60% -5.50% -5.50%

Service revenue (in millions) 5,797 6,302 6,747 7,815 8,222 8,621 8,971 9,316 Service rev YOY growth 8.31% 8.71% 7.06% 15.82% 5.21% 4.86% 4.05% 3.85%

Data processing revenue driversVisa processed transactions (in millions) 64,993 70,968 83,159 105,612 119,426 133,459 147,285 161,984 Visa processed transactions YOY growth 11.15% 9.19% 17.18% 27.00% 13.08% 11.75% 10.36% 9.98%

Data processing revenue (cents per transaction) 7.95 7.82 7.54 7.19 6.90 6.64 6.40 6.18 Data processing rev per transaction YOY growth 0.14% -1.60% -3.59% -4.70% -4.00% -3.80% -3.60% -3.50%

Data processing revenue (in millions) 5,167 5,552 6,272 7,591 8,241 8,859 9,425 10,003 Data processing rev YOY growth 11.31% 7.45% 12.97% 21.03% 8.56% 7.50% 6.39% 6.13%

International transaction fee driversPayments volume, int'l (in billions) 2,198 2,290 2,800 4,763 5,425 6,090 6,729 7,380 Int'l pmts. Vol. YOY growth 8.28% 4.19% 22.27% 70.12% 13.88% 12.26% 10.50% 9.67%Int'l pmts. Vol. as % of total pmts. Vol. 48.13% 46.89% 49.55% 66.37% 66.74% 67.45% 67.69% 67.55%Int'l pmts. Vol. YOY growth -0.50% -2.58% 5.68% 33.95% 0.56% 1.06% 0.35% -0.20%Int'l transaction fee yield % (percentage of int'lpayment volume that translates into internationaltransaction fees) 0.162% 0.177% 0.166% 0.131% 0.126% 0.122% 0.118% 0.114%Int'l transaction fee yield YOY growth -2.98% 9.57% -6.44% -20.94% -3.85% -3.35% -3.17% -3.80%International transaction fees (in millions) 3,560 4,064 4,649 6,253 6,847 7,429 7,949 8,386 Int'l transaction fee YOY growth 5.05% 14.16% 14.39% 34.50% 9.50% 8.50% 7.00% 5.50%

VISA INC.Income Statement

Fiscal Years Ending Sep. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Operating Revenues:Service revenues 5,797 6,302 6,747 7,815 8,222 8,621 8,971 9,316 Data processing revenues 5,167 5,552 6,272 7,591 8,241 8,859 9,425 10,003 International transaction revenues 3,560 4,064 4,649 6,253 6,847 7,429 7,949 8,386 Other revenues 770 823 823 844 869 888 908 931 Client incentives (2,592) (2,861) (3,409) (4,126) (4,535) (4,985) (5,479) (6,023) Net operating revenues 12,702 13,880 15,082 18,377 19,643 20,812 21,773 22,612 Operating Expenses:Personnel 1,875 2,079 2,226 2,881 3,079 3,263 3,413 3,545 Marketing 900 872 869 1,341 1,433 1,518 1,588 1,650 Network and processing 507 474 538 705 754 799 836 868 Professional fees 328 336 389 560 599 635 664 689 Depreciation and amortization 435 494 502 532 665 711 753 788 General and administrative 507 547 796 739 790 837 876 910 Litigation provision 453 14 2 18 15 11 10 10 Visa Europe Framework Agreement loss - - 1,877 - - - - - Total operating expenses 5,005 4,816 7,199 6,776 7,336 7,773 8,140 8,459 Operating income 7,697 9,064 7,883 11,600 12,308 13,038 13,632 14,153 Non-operating income (expense) 27 (69) 129 - - - - - Income before income taxes 7,724 8,995 8,012 11,600 12,308 13,038 13,632 14,153 Income tax provision 2,286 2,667 2,021 3,480 3,692 3,912 4,090 4,246 Net income including non-controlling interest 5,438 6,328 5,991 8,120 8,615 9,127 9,543 9,907 Loss attributable to non-controlling interest - - - - - - - - Net income attributable to Visa Inc. 5,438 6,328 5,991 8,120 8,615 9,127 9,543 9,907

Basic earnings per share:Class A common stock 2.16$ 2.58$ 2.49$ 3.60$ 3.93$ 4.28$ 4.60$ 4.91$ Class B common stock 3.63$ 4.26$ 4.10$ 5.59$ 5.97$ 6.42$ 6.82$ 7.15$ Class C common stock 8.65$ 10.33$ 9.94$ 12.23$ 14.22$ 15.14$ 17.39$ 16.98$

Basic weighted-average shares outstanding: Class A common stock 1,992 1,954 1,906 1,817 1,767 1,721 1,678 1,638Class B common stock 245 245 245 245 245 245 245 245Class C common stock 26 22 19 17 14 12 9 7

Approx. Net Income Allocation per Class (%)Class A Common Stock 79.16% 79.67% 79.09% 80.56% 80.70% 80.77% 80.86% 81.12%Class B Common Stock 16.35% 16.49% 16.79% 16.88% 16.99% 17.24% 17.50% 17.68%Class C Common Stock 4.14% 3.59% 3.09% 2.56% 2.31% 1.99% 1.64% 1.20%Note: doesn’t always add up to 100% b/c of misc.adjustments such as minority interest, otherparticipating securities

Approx. Net Income Allocation per Class ($)Class A Common Stock 4305 5042 4,738 6,542 6,953 7,372 7,716 8,037Class B Common Stock 889 1043 1,006 1,371 1,464 1,573 1,670 1,752Class C Common Stock 225 227 185 208 199 182 156 119

Dividend per share 0.40$ 0.48$ 0.56$ 0.71$ 0.90$ 1.15$ 1.46$ 1.85$

(in $ millions, except per share data)

VISA INC.Balance Sheet


Assets:Cash and cash equivalents 1,971 3,518 5,619 12,466 17,099 22,956 29,990 33,817 Restricted cash-U.S. litigation escrow 1,498 1,072 1,027 1,032 1,038 1,043 1,049 1,054 Investment securities:Trading 69 66 71 73 74 76 78 80 Available-for-sale 1,910 2,431 3,248 3,327 3,407 3,490 3,574 3,660 Income tax receivable 91 - - - - - - - Settlement receivable 786 408 1,467 1,102 1,178 1,248 1,306 1,357 Accounts receivable 822 847 1,041 1,208 1,292 1,368 1,432 1,487 Customer collateral 961 1,023 1,001 1,353 1,447 1,533 1,603 1,665 Current portion of client incentives 210 303 284 372 398 421 441 458 Deferred tax assets 1,028 - - - - - - - Prepaid expenses and other current assets 216 353 555 393 420 445 465 483 Total current assets 9,562 10,021 14,313 21,326 26,352 32,581 39,938 44,061 Investment securities, available-for-sale 3,015 3,384 3,931 4,026 4,124 4,223 4,326 4,430 Client incentives 81 110 448 210 224 238 249 258 Property, equipment and technology, net 1,892 1,888 2,150 2,688 2,873 3,044 3,185 3,308 Other assets 855 778 893 921 921 921 921 921 Intangible assets, net 11,411 11,361 27,234 26,381 26,381 26,381 26,381 26,381 Goodwill 11,753 11,825 15,066 15,066 15,066 15,066 15,066 15,066 Total assets 38,569 39,367 64,035 70,618 75,941 82,454 90,065 94,425 Liabilities:Accounts payable 147 127 203 237 253 268 280 291 Settlement payable 1,332 780 2,084 1,736 1,855 1,966 2,056 2,136 Customer collateral 961 1,023 1,001 1,353 1,447 1,533 1,603 1,665 Accrued compensation and benefits 450 503 673 753 805 853 892 926 Client incentives 1,036 1,049 1,976 1,639 1,751 1,856 1,941 2,016 Accrued liabilities 624 849 1,128 1,077 1,152 1,220 1,277 1,326 Accrued litigation 1,456 1,024 981 986 991 997 1,002 1,007 Current maturities of long-term debt and short- term debt - - - 2,313 - - 2,988 - Total current liabilities 6,006 5,355 8,046 10,094 8,254 8,691 12,040 9,368 Long-term debt - - 15,882 14,138 14,138 14,138 11,150 11,150 Deferred tax liabilities 4,145 3,273 4,808 4,087 4,087 4,087 4,087 4,087 Deferred purchase consideration - - 1,225 1,225 1,225 - - - Other liabilities 1,005 897 1,162 1,274 1,396 1,530 1,677 1,838 Total liabilities, commitments and contingencies 11,156 9,525 31,123 30,817 29,100 28,446 28,953 26,442 Equity:Preferred stock - - 5,717 5,717 5,717 5,717 5,717 5,717 Treasury stock - - (170) (170) (170) (170) (170) (170) Right to recover for covered losses - - (34) - - - - - Additional paid-in capital 18,299 18,073 17,395 17,461 17,526 17,592 17,657 17,723 Accumulated income 9,131 11,843 10,462 17,252 24,227 31,327 38,365 45,171 Accumulated other comprehensive loss, net: (17) (74) (458) (458) (458) (458) (458) (458) Total equity 27,413 29,842 32,912 39,801 46,842 54,008 61,111 67,983 Total liabilities and equity 38,569 39,367 64,035 70,618 75,941 82,454 90,065 94,425


VISA INC.Cash Flow Statement

Fiscal Years Ending Sep. 30 2012 2013 2014 2015 2016

Operating Activities:Net income 2,142 4,980 5,438 6,328 5,991 Adjustments to reconcile net income to net cashprovided by operating activities:Client incentives 2,155 2,321 2,592 2,861 3,409 Fair value adjustment for the Visa Europe put option - - - 110 (255) Share-based compensation 147 179 172 187 221 Excess tax benefit for share-based compensation (71) (74) (90) (84) (63) Depreciation and amortization of property, equipment,technology and intangible assets 333 397 435 494 502 Deferred income taxes (1,690) 1,527 (580) 195 (764) Right to recover for covered losses recorded in equity - - - - (9) Litigation provision 4,101 3 453 14 4 Other (8) 50 37 24 64 Change in operating assets and liabilities:Settlement receivable (42) (345) 13 378 391 Accounts receivable (161) (38) (53) (19) (65) Client incentives (1,757) (2,336) (2,395) (2,970) (3,508) Other assets (26) (506) (379) (41) (315) Accounts payable (17) 40 (56) (13) 43 Settlement payable 270 506 107 (552) (302) Accrued and other liabilities (227) 702 513 118 277 Accrued litigation (140) (4,384) 998 (446) (47) Net cash provided by operating activities 5,009 3,022 7,205 6,584 5,574 Investing Activities:Purchases of property, equipment, technology andintangible assets (376) (471) (553) (414) (523) Proceeds from sales of property, equipment andtechnology 2 - - 10 - Investment securities, available-for-sale:Purchases (4,140) (3,164) (2,572) (2,850) (28,004) Proceeds from maturities and sales 2,093 2,440 2,342 1,925 26,697 Acquisitions, net of $2.8 billion cash received fromVisa Europe (3) - (149) (93) (9,082) Purchases of / contributions to other investments (12) (3) (9) (25) (10) Proceeds / distributions from other investments 22 34 - 12 6 Net cash used in investing activities (2,414) (1,164) (941) (1,435) (10,916) Financing Activities:Repurchase of class A common stock (Note 14) (710) (5,365) (4,118) (2,910) (6,987) Treasury stock-class C common stock (Note 2) - - - - (170) Dividends paid (Note 14) (595) (864) (1,006) (1,177) (1,350) Proceeds from issuance of senior notes (Note 9) - - - - 15,971 Debt issuance costs (Note 9) - - - - (98) Deposit into U.S. litigation escrow account-U.S.retrospective responsibility plan (Note 3 and Note 20) (1,715) - (450) - - Payments from (return to) U.S. litigation escrowaccount-U.S. retrospective responsibility plan (Note 3 andNote 20) 140 4,383 (999) 426 45 Cash proceeds from issuance of common stock under employeeequity plans 174 108 91 82 95 Restricted stock and performance-based shares settled incash for taxes - (64) (86) (108) (92) Excess tax benefit for share-based compensation 71 74 90 84 63 Payments for earn-out related to PlaySpan acquisition (14) (12) - - - Principal payments on capital lease obligations (6) (6) - - - Net cash provided by (used in) financing activities (2,655) (1,746) (6,478) (3,603) 7,477 Effect of exchange rate changes on cash and cashequivalents 7 - (1) 1 (34) Increase (decrease) in cash and cash equivalents (53) 112 (215) 1,547 2,101 Cash and cash equivalents at beginning of year 2,127 2,074 2,186 1,971 3,518 Cash and cash equivalents at end of year 2,074 2,186 1,971 3,518 5,619


VISA INC.Cash Flow Statement (Forecast)

Fiscal Years Ending Sep. 30 2017E 2018E 2019E 2020E 2021E

Operating Activities:Net income 8,120 8,615 9,127 9,543 9,907 Adjustments to reconcile net income to cash from operating activities:Change in restricted cash-U.S. litigation escrow (5) (5) (5) (5) (5) Change in deferred taxes (721) - - - - Changes in working capital accounts:Settlement receivable 365 (76) (70) (58) (50) Accounts receivable (167) (83) (77) (63) (55) Customer collateral (352) (93) (86) (71) (62) Current portion of client incentives (88) (26) (24) (19) (17) Prepaid expenses and other current assets 162 (27) (25) (21) (18) Client incentives 238 (14) (13) (11) (10) Property, equipment and technology, net (538) (185) (171) (141) (123) Accounts payable 34 16 15 12 11 Settlement payable (348) 120 110 91 79 Customer collateral 352 93 86 71 62 Accrued compensation and benefits 80 52 48 39 34 Client incentives (337) 113 104 86 75 Accrued liabilities (51) 74 69 56 49 Accrued litigation 5 5 5 5 5 Other liabilities 112 122 134 147 161 Net cash provided by (used in) operating activities 6,859 8,701 9,227 9,661 10,043 Investing Activities:Other assets (28) - - - - Investment securities:Trading (2) (2) (2) (2) (2) Available-for-sale (79) (81) (82) (84) (86) Investment securities, available-for-sale (95) (97) (100) (102) (105) Deferred purchase consideration - - (1,225) - - Intangible assets, net 853 - - - - Net cash provided by (used in) investing activities 650 (180) (1,409) (188) (193) Financing Activities:Current maturities of long-term debt and short- term debt 2,313 (2,313) - 2,988 (2,988) Long-term debt (1,744) - - (2,988) - Preferred stock - - - - - Treasury stock - - - - - Right to recover for covered losses 34 - - - - Additional paid-in capital 66 66 66 66 66 Dividends paid (1,330) (1,641) (2,026) (2,505) (3,101) Accumulated other comprehensive loss, net: - - - - - Net cash provided by (used in) financing activities (662) (3,888) (1,960) (2,439) (6,024)

Effect of exchange rate changes on cash and cash equivalentsIncrease (decrease) in cash and cash equivalents 6,847 4,633 5,857 7,034 3,827 Cash and cash equivalents at beginning of year 5,619 12,466 17,099 22,956 29,990 Cash and cash equivalents at end of year 12,466 17,099 22,956 29,990 33,817


VISA INC.Common Size Income Statement (as % of Sales)

Fiscal Years Ending Sep. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021EOperating Revenues:Service revenues 45.64% 45.40% 44.74% 42.52% 41.86% 41.42% 41.20% 41.20%Data processing revenues 40.68% 40.00% 41.59% 41.31% 41.95% 42.57% 43.29% 44.24%International transaction revenues 28.03% 29.28% 30.82% 34.03% 34.86% 35.70% 36.51% 37.09%Other revenues 6.06% 5.93% 5.46% 4.59% 4.42% 4.26% 4.17% 4.12%Client incentives -20.41% -20.61% -22.60% -22.45% -23.09% -23.95% -25.17% -26.64%Net operating revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Operating Expenses:Personnel 14.76% 14.98% 14.76% 15.68% 15.68% 15.68% 15.68% 15.68%Marketing 7.09% 6.28% 5.76% 7.30% 7.30% 7.30% 7.30% 7.30%Network and processing 3.99% 3.41% 3.57% 3.84% 3.84% 3.84% 3.84% 3.84%Professional fees 2.58% 2.42% 2.58% 3.05% 3.05% 3.05% 3.05% 3.05%Depreciation and amortization 3.42% 3.56% 3.33% 2.89% 3.39% 3.42% 3.46% 3.49%General and administrative 3.99% 3.94% 5.28% 4.02% 4.02% 4.02% 4.02% 4.02%Litigation provision 3.57% 0.10% 0.01% 0.10% 0.08% 0.05% 0.05% 0.04%Visa Europe Framework Agreement loss 0.00% 0.00% 12.45% 0.00% 0.00% 0.00% 0.00% 0.00%Total operating expenses 39.40% 34.70% 47.73% 36.87% 37.34% 37.35% 37.39% 37.41%Operating income 60.60% 65.30% 52.27% 63.13% 62.66% 62.65% 62.61% 62.59%Non-operating income (expense) 0.21% -0.50% 0.86% 0.00% 0.00% 0.00% 0.00% 0.00%Income before income taxes 60.81% 64.81% 53.12% 63.13% 62.66% 62.65% 62.61% 62.59%Income tax provision 18.00% 19.21% 13.40% 18.94% 18.80% 18.79% 18.78% 18.78%Net income including non-controlling interest 42.81% 45.59% 39.72% 44.19% 43.86% 43.85% 43.83% 43.81%Loss attributable to non-controlling interest 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net income attributable to Visa Inc. 42.81% 45.59% 39.72% 44.19% 43.86% 43.85% 43.83% 43.81%

VISA INC.Common Size Balance Sheet (as % of Sales)

Fiscal Years Ending Sep. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021EAssets:Cash and cash equivalents 15.52% 25.35% 37.26% 67.84% 87.05% 110.30% 137.74% 149.55%Restricted cash-U.S. litigation escrow 11.79% 7.72% 6.81% 5.62% 5.28% 5.01% 4.82% 4.66%Investment securities:Trading 0.54% 0.48% 0.47% 0.40% 0.38% 0.37% 0.36% 0.35%Available-for-sale 15.04% 17.51% 21.54% 18.10% 17.35% 16.77% 16.42% 16.19%Income tax receivable 0.72% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Settlement receivable 6.19% 2.94% 9.73% 6.00% 6.00% 6.00% 6.00% 6.00%Accounts receivable 6.47% 6.10% 6.90% 6.58% 6.58% 6.58% 6.58% 6.58%Customer collateral 7.57% 7.37% 6.64% 7.36% 7.36% 7.36% 7.36% 7.36%Current portion of client incentives 1.65% 2.18% 1.88% 2.02% 2.02% 2.02% 2.02% 2.02%Deferred tax assets 8.09% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Prepaid expenses and other current assets 1.70% 2.54% 3.68% 2.14% 2.14% 2.14% 2.14% 2.14%Total current assets 75.28% 72.20% 94.90% 116.05% 134.15% 156.55% 183.43% 194.85%Investment securities, available-for-sale 23.74% 24.38% 26.06% 21.91% 20.99% 20.29% 19.87% 19.59%Client incentives 0.64% 0.79% 2.97% 1.14% 1.14% 1.14% 1.14% 1.14%Property, equipment and technology, net 14.90% 13.60% 14.26% 14.63% 14.63% 14.63% 14.63% 14.63%Other assets 6.73% 5.61% 5.92% 5.01% 4.69% 4.43% 4.23% 4.07%Intangible assets, net 89.84% 81.85% 180.57% 143.56% 134.30% 126.76% 121.17% 116.67%Goodwill 92.53% 85.19% 99.89% 81.98% 76.70% 72.39% 69.20% 66.63%Total assets 303.65% 283.62% 424.58% 384.28% 386.61% 396.19% 413.66% 417.58%Liabilities:Accounts payable 1.16% 0.91% 1.35% 1.29% 1.29% 1.29% 1.29% 1.29%Settlement payable 10.49% 5.62% 13.82% 9.44% 9.44% 9.44% 9.44% 9.44%Customer collateral 7.57% 7.37% 6.64% 7.36% 7.36% 7.36% 7.36% 7.36%Accrued compensation and benefits 3.54% 3.62% 4.46% 4.10% 4.10% 4.10% 4.10% 4.10%Client incentives 8.16% 7.56% 13.10% 8.92% 8.92% 8.92% 8.92% 8.92%Accrued liabilities 4.91% 6.12% 7.48% 5.86% 5.86% 5.86% 5.86% 5.86%Accrued litigation 11.46% 7.38% 6.50% 5.37% 5.05% 4.79% 4.60% 4.45%Current maturities of long-term debt and short- term debt 0.00% 0.00% 0.00% 12.59% 0.00% 0.00% 13.72% 0.00%Total current liabilities 47.28% 38.58% 53.35% 54.93% 42.02% 41.76% 55.30% 41.43%Long-term debt 0.00% 0.00% 105.30% 76.93% 71.97% 67.93% 51.21% 49.31%Deferred tax liabilities 32.63% 23.58% 31.88% 22.24% 20.80% 19.64% 18.77% 18.07%Deferred purchase consideration 0.00% 0.00% 8.12% 6.67% 6.24% 0.00% 0.00% 0.00%Other liabilities 7.91% 6.46% 7.70% 6.93% 7.11% 7.35% 7.70% 8.13%Total liabilities, commitments and contingencies 87.83% 68.62% 206.36% 167.70% 148.14% 136.68% 132.98% 116.94%Equity:Preferred stock 0.00% 0.00% 37.91% 31.11% 29.10% 27.47% 26.26% 25.28%Treasury stock 0.00% 0.00% -1.13% -0.93% -0.87% -0.82% -0.78% -0.75%Right to recover for covered losses 0.00% 0.00% -0.23% 0.00% 0.00% 0.00% 0.00% 0.00%Additional paid-in capital 144.06% 130.21% 115.34% 95.02% 89.22% 84.53% 81.10% 78.38%Accumulated income 71.89% 85.32% 69.37% 93.88% 123.33% 150.53% 176.21% 199.76%Accumulated other comprehensive loss, net: -0.13% -0.53% -3.04% -2.49% -2.33% -2.20% -2.10% -2.03%Total equity 215.82% 215.00% 218.22% 216.59% 238.46% 259.51% 280.68% 300.65%Total liabilities and equity 303.65% 283.62% 424.58% 384.28% 386.61% 396.19% 413.66% 417.58%

VISA INC.Value Driver Estimation

Fiscal Years Ending Sep. 30 2014 2015 2016 2017E 2018E 2019E 2020E 2021EKey assumptions:Marginal tax rate 33.00% 33.00% 30.00% 30.00% 30.00% 30.00% 30.00% 30.00%WACC 7.58% 7.63% 7.01% 7.01% 7.01% 7.01% 7.01% 7.01%Normal Cash (% of sales) 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%Cost of Debt 3.89% 3.89% 3.96% 3.96% 3.96% 3.96% 3.96% 3.96%

NOPLAT ComputationOperating revenuesService revenues 5,797 6,302 6,747 7,815 8,222 8,621 8,971 9,316 Data processing revenues 5,167 5,552 6,272 7,591 8,241 8,859 9,425 10,003 International transaction fees 3,560 4,064 4,649 6,253 6,847 7,429 7,949 8,386 Other revenues 770 823 823 844 869 888 908 931 Client incentives (2,592) (2,861) (3,409) (4,126) (4,535) (4,985) (5,479) (6,023) Total operating revenues 12,702 13,880 15,082 18,377 19,643 20,812 21,773 22,612

Operating expensesPersonnel expenses 1,875 2,079 2,226 2,881 3,079 3,263 3,413 3,545 Marketing 900 872 869 1,341 1,433 1,518 1,588 1,650 Network & processing 507 474 538 705 754 799 836 868 Professional fees 328 336 389 560 599 635 664 689 Depreciation & amortization 435 494 502 532 665 711 753 788 General & administrative expenses 507 547 796 739 790 837 876 910 Total operating expenses 4,552 4,802 5,320 6,758 7,321 7,762 8,130 8,449 Implied interest on op. leases 12.22 11.78 21.10 26.38 28.19 29.87 31.25 32.46 EBITA 8,162 9,090 9,783 11,645 12,351 13,079 13,674 14,195

Income tax provision 2,286 2,667 2,021 3,480 3,692 3,912 4,090 4,246 Tax shield on non‐operating income (expense) 9 (23) 39 ‐ ‐ ‐ ‐ ‐ Tax shield on interest expense ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ Tax shield on implied interest 4.03 3.89 6.33 7.91 8.46 8.96 9.37 9.74 Tax shield on litigation provision 149 5 1 5 5 3 3 3 Tax shield on Visa Europe Framework Agreement loss ‐ ‐ 132 ‐ ‐ ‐ ‐ ‐ Adjusted Taxes 2,431 2,699 2,121 3,493 3,705 3,924 4,102 4,259

Change in deferred taxes (580) 195 (764) (721) - - - -

NOPLAT: EBITA - Adjusted Taxes + Change in DT 5,151 6,586 6,898 7,430 8,646 9,156 9,572 9,937

Invested Capital ComputationNormal cash 889 972 1,056 1,286 1,375 1,457 1,524 1,583 Income tax receivable 91 ‐ ‐ ‐ ‐ ‐ ‐ ‐ Settlement receivable 786 408 1,467 1,102 1,178 1,248 1,306 1,357 Accounts receivable, net 822 847 1,041 1,208 1,292 1,368 1,432 1,487 Customer collateral 961 1,023 1,001 1,353 1,447 1,533 1,603 1,665 Current portion of client incentives 210 303 284 372 398 421 441 458 Prepaid expenses & other current assets 307 353 555 393 420 445 465 483 Operating Current Assets 4,066 3,906 5,404 5,715 6,109 6,472 6,771 7,032

Accounts payable 147 127 203 237 253 268 280 291 Settlement payable 1,332 780 2,084 1,736 1,855 1,966 2,056 2,136 Customer collateral 961 1,023 1,001 1,353 1,447 1,533 1,603 1,665 Accrued compensation and benefits 450 503 673 753 805 853 892 926 Client incentives ‐ ST 1,036 1,049 1,976 1,639 1,751 1,856 1,941 2,016 Accrued liabilities 624 868 1,128 1,077 1,152 1,220 1,277 1,326 Operating Current Liabilities 4,550 4,350 7,065 6,795 7,263 7,695 8,050 8,361

Net Operating WC (484) (444) (1,661) (1,080) (1,154) (1,223) (1,279) (1,329)

PP&E, net 1,892 1,888 2,150 2,688 2,873 3,044 3,185 3,308 PV of operating leases 303 341 533 666 712 755 790 820

Client incentives ‐ LT 81 110 448 210 224 238 249 258 Total other assets 855 778 893 921 921 921 921 921 Intangible assets 11,411 11,361 27,234 26,381 26,381 26,381 26,381 26,381 Other LT operating assets 12,347 12,249 28,575 27,512 27,526 27,540 27,551 27,560

Total other liabilities 1,005 897 1,162 1,274 1,396 1,530 1,677 1,838 Other LT operating liabilities 1,005 897 1,162 1,274 1,396 1,530 1,677 1,838

Invested Capital 13,053 13,137 28,435 28,513 28,562 28,586 28,569 28,522

ROIC 39.39% 50.46% 52.51% 26.13% 30.32% 32.05% 33.48% 34.78%Ending NOPLAT 5,151 6,586 6,898 7,430 8,646 9,156 9,572 9,937 Beg. Invested Capital 13,078 13,053 13,137 28,435 28,513 28,562 28,586 28,569 Ending NOPLAT/Beg. Invested Capital 39.39% 50.46% 52.51% 26.13% 30.32% 32.05% 33.48% 34.78%

EP 4,160 5,591 5,977 5,437 6,647 7,153 7,568 7,934 Beg. Invested Capital 13,078 13,053 13,137 28,435 28,513 28,562 28,586 28,569 ROIC 39.39% 50.46% 52.51% 26.13% 30.32% 32.05% 33.48% 34.78%WACC 7.58% 7.63% 7.01% 7.01% 7.01% 7.01% 7.01% 7.01%Beg. Invested Capital*(ROIC ‐ WACC) 4,160 5,591 5,977 5,437 6,647 7,153 7,568 7,934

FCF 5,176 6,502 (8,399) 7,351 8,597 9,131 9,589 9,984 Ending NOPLAT 5,151 6,586 6,898 7,430 8,646 9,156 9,572 9,937 Beg. Invested Capital 13,078 13,053 13,137 28,435 28,513 28,562 28,586 28,569 Ending Invested Capital 13,053 13,137 28,435 28,513 28,562 28,586 28,569 28,522 Ending NOPLAT ‐ (Ending Invested Capital ‐ Beg. Invested Capital) 5,176 6,502 (8,399) 7,351 8,597 9,131 9,589 9,984

VISA INC.Weighted Average Cost of Capital (WACC) Estimation

Capital Structure

Bond Coupon Ratings (S&P) Price ($) Yield MV of Bond ($ in millions)MV of Operating

Leases ($ in millions) MV of Debt ($ in millions) Current Share PriceNumber of Shares

Outstanding (in millions)MV of Equity ($ in

millions) Debt % Equity %1.20% Senior Notes due December 2017 1.200 A+ 100.140 1.02% 1,7542.20% Senior Notes due December 2020 2.200 A+ 100.522 2.05% 3,0772.80% Senior Notes due December 2022 2.800 A+ 101.051 2.60% 2,3593.15% Senior Notes due December 2025 3.150 A+ 100.554 3.08% 4,2254.15% Senior Notes due December 2035 4.150 A+ 104.147 3.83% 1,6984.30% Senior Notes due December 2045 4.300 A+ 105.783 3.96% 4,045

Total 17,158 533 17,691 87.46 2,130 186,282 8.67% 91.33%

CAPMRisk-Free Rate 3.03%Equity Market Risk Premium 4.80%Beta 0.913Cost of Equity 7.41%

Cost of Debt 3.96%Cost of Equity 7.41%Debt % 8.67%Equity % 91.33%Marginal tax rate 30.00%WACC 7.01%

VISA INC.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 3.82% CV ROIC 34.78% WACC 7.01% Cost of Equity 7.41%

Fiscal Years Ending Sep. 30 2017E 2018E 2019E 2020E 2021E1 2 3 4 5

DCF ModelEnding NOPLAT 7,430 8,646 9,156 9,572 9,937 Beg. Invested Capital 28,435 28,513 28,562 28,586 28,569 Ending Invested Capital 28,513 28,562 28,586 28,569 28,522 Change in Invested Capital 78 49 24 (17) (47)ROIC 26% 30% 32% 33% 35%

FCF 7,351 8,597 9,131 9,589 9,984 CV 276,932 PV of FCF 6,870 7,507 7,452 218,505

Value of Operating Assets 240,334 Excess Cash 4,563 Restricted cash-U.S. litigation escrow 1,027 Investment securities:Trading 71 Available-for-sale 3,248 Investment securities, available-for-sale 3,931 Accrued litigation (981) Current maturities of long-term debt and short- term debt - Long-term debt (17,158) Deferred purchase consideration (1,225) PV of operating leases (533) PV of ESOP (460) Value of Equity 232,817 79.09% Class A Allocation 184,135 Class A Shares Outstanding 1,868 Intrinsic Value (9/30/2016) 98.60$ Price Today 101.11$

EP ModelEnding NOPLAT 7,430 8,646 9,156 9,572 9,937 Beg. Invested Capital 28,435 28,513 28,562 28,586 28,569 ROIC 26% 30% 32% 33% 35%

EP 5,437 6,647 7,153 7,568 7,934 CV 248,363 PV of EP 5,081 5,805 5,838 195,177

Total PV of EP 211,900 Beg. Invested Capital 28,435 Value of Operating Assets 240,334 Excess Cash 4,563 Restricted cash-U.S. litigation escrow 1,027 Investment securities:Trading 71 Available-for-sale 3,248 Investment securities, available-for-sale 3,931 Accrued litigation (981) Current maturities of long-term debt and short- term debt - Long-term debt (17,158) Deferred purchase consideration (1,225) PV of operating leases (533) PV of ESOP (460) Value of Equity 232,817 79.09% Class A Allocation 184,135 Class A Shares Outstanding 1,868 Intrinsic Value (9/30/2016) 98.60$ Price Today 101.11$

VISA INC.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Sep. 30 2017E 2018E 2019E 2020E 2021E1 2 3 4 5

EPS 3.60$ 3.93$ 4.28$ 4.60$ 4.91$

Key Assumptions CV growth 3.82% CV ROE 14.57% Cost of Equity 7.41%

Future Cash Flows P/E Multiple (CV Year) 20.52 EPS (CV Year) 4.91$ Future Stock Price 100.67$ Dividends Per Share 0.71$ 0.90$ 1.15$ 1.46$ Future Cash Flows 0.71$ 0.90$ 1.15$ 102.13$

Discounted Cash Flows 0.66$ 0.78$ 0.92$ 76.72$

Intrinsic Value (9/30/2016) 79.09$ Price Today 81.11$

VISA INC.Relative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2017E 2018E P/E 17 P/E 18 EPS gr. PEG 17 PEG 18MA MasterCard Incorporated $109.42 $4.26 $4.96 25.7 22.1 11.08 2.32 1.99 AXP American Express Company $79.76 $5.66 $6.25 14.1 12.8 5.10 2.76 2.50 DFS Discover Financial Services $71.22 $6.07 $6.78 11.7 10.5 7.40 1.59 1.42 PYPL PayPal Holdings, Inc. $41.96 $6.07 $6.78 6.9 6.2 13.03 0.53 0.47

Average 14.6 12.9 1.8 1.6

V VISA INC. $87.46 $3.60 $3.93 24.3 22.2 14.5 1.7 1.5

Implied Value: PEG Ratio (EPS17) 94.08$ PEG Ratio (EPS18) 91.24$ Price Today 96.47$

VISA INC.Key Management Ratios


Liquidity RatiosCash Ratio (Cash & Cash Equivalents / Current Liabilities) 0.33 0.66 0.70 1.24 2.07 2.64 2.49 3.61 Current Ratio (Current Assets / Current Liabilities) 1.59 1.87 1.78 2.11 3.19 3.75 3.32 4.70 Quick Ratio ((Cash & Cash Equivalents + Short-Term Investments + Accounts Receivable) / Current Liabilities) 0.79 1.28 1.24 1.69 2.65 3.21 2.91 4.17

Activity or Asset-Management RatiosAsset Turnover Ratio (Total Revenues / Total Assets) 0.33 0.35 0.24 0.26 0.26 0.25 0.24 0.24 Receivables Turnover (Total Revenues / Total Accounts Receivables) 15.45 16.39 14.49 15.21 15.21 15.21 15.21 15.21 Fixed Asset Turnover (Total Revenues / Total PP&E) 6.71 7.35 7.01 6.84 6.84 6.84 6.84 6.84

Financial Leverage RatiosDebt Ratio (Total Debt / Total Assets) 28.92% 24.20% 48.60% 43.64% 38.32% 34.50% 32.15% 28.00%Debt/Equity Ratio (Total Debt / Total Equity) 40.70% 31.92% 94.56% 77.43% 62.12% 52.67% 47.38% 38.90%Equity Ratio (Total Equity / Total Assets) 71.08% 75.80% 51.40% 56.36% 61.68% 65.50% 67.85% 72.00%

Profitability RatiosROA (Net Income / Total Assets) 14.10% 16.07% 9.36% 11.50% 11.34% 11.07% 10.60% 10.49%ROE (Net Income / Total Equity) 19.84% 21.21% 18.20% 20.40% 18.39% 16.90% 15.62% 14.57%EBITA Margin (EBITA / Total Revenues) 64.26% 65.49% 64.87% 63.37% 62.88% 62.85% 62.80% 62.78%

Payout Policy RatiosPayout Ratio (Dividends per Share / EPS) 18.50% 18.60% 22.49% 19.75% 22.95% 26.76% 31.65% 37.67%

VISA INC.Sensitivity Analysis

101.11 0.513 0.613 0.713 0.813 0.913 1.013 1.113 1.213 1.3139.49% 100.26 100.44 100.61 100.79 100.96 101.13 101.31 101.48 101.659.59% 100.30 100.47 100.65 100.82 101.00 101.17 101.34 101.52 101.699.69% 100.33 100.51 100.68 100.86 101.03 101.21 101.38 101.55 101.739.79% 100.37 100.54 100.72 100.89 101.07 101.24 101.42 101.59 101.76

CV Total Payments Volume YOY Growth 9.89% 100.40 100.58 100.76 100.93 101.11 101.28 101.45 101.63 101.809.99% 100.44 100.62 100.79 100.97 101.14 101.32 101.49 101.66 101.84

10.09% 100.48 100.65 100.83 101.00 101.18 101.35 101.53 101.70 101.8710.19% 100.51 100.69 100.86 101.04 101.21 101.39 101.56 101.74 101.9110.29% 100.55 100.72 100.90 101.08 101.25 101.42 101.60 101.77 101.94

101.11 2.63% 2.73% 2.83% 2.93% 3.03% 3.13% 3.23% 3.33% 3.43%9.58% 100.81 100.84 100.88 100.91 100.95 100.98 101.02 101.06 101.099.68% 100.85 100.88 100.92 100.95 100.99 101.02 101.06 101.10 101.139.78% 100.88 100.92 100.96 100.99 101.03 101.06 101.10 101.13 101.179.88% 100.92 100.96 100.99 101.03 101.07 101.10 101.14 101.17 101.21

CV Visa Processed Transactions YOY Growth 9.98% 100.96 101.00 101.03 101.07 101.11 101.14 101.18 101.21 101.2510.08% 101.00 101.04 101.07 101.11 101.14 101.18 101.22 101.25 101.2910.18% 101.04 101.08 101.11 101.15 101.18 101.22 101.25 101.29 101.3310.28% 101.08 101.11 101.15 101.19 101.22 101.26 101.29 101.33 101.3610.38% 101.12 101.15 101.19 101.23 101.26 101.30 101.33 101.37 101.40

101.11 4.40% 4.50% 4.60% 4.70% 4.80% 4.90% 5.00% 5.10% 5.20%5.10% 100.84 100.87 100.90 100.94 100.97 101.00 101.04 101.07 101.105.20% 100.87 100.90 100.94 100.97 101.00 101.04 101.07 101.10 101.145.30% 100.90 100.94 100.97 101.00 101.04 101.07 101.10 101.14 101.175.40% 100.94 100.97 101.00 101.04 101.07 101.10 101.14 101.17 101.20

CV International Transaction Fee YOY Growth 5.50% 100.97 101.01 101.04 101.07 101.11 101.14 101.17 101.20 101.245.60% 101.01 101.04 101.07 101.11 101.14 101.17 101.21 101.24 101.275.70% 101.04 101.07 101.11 101.14 101.17 101.21 101.24 101.27 101.315.80% 101.07 101.11 101.14 101.17 101.21 101.24 101.27 101.31 101.345.90% 101.11 101.14 101.17 101.21 101.24 101.27 101.31 101.34 101.37

101.11 34.38% 34.48% 34.58% 34.68% 34.78% 34.88% 34.98% 35.08% 35.18%6.61% 115.77 115.81 115.85 115.89 115.93 115.96 116.00 116.04 116.086.71% 111.69 111.73 111.76 111.80 111.84 111.87 111.91 111.94 111.986.81% 107.88 107.91 107.95 107.98 108.02 108.05 108.09 108.12 108.166.91% 104.31 104.34 104.38 104.41 104.45 104.48 104.51 104.55 104.58

WACC 7.01% 100.97 101.01 101.04 101.07 101.10 101.14 101.17 101.20 101.237.11% 97.83 97.86 97.89 97.92 97.95 97.98 98.02 98.05 98.087.21% 94.87 94.90 94.93 94.96 94.99 95.02 95.05 95.08 95.117.31% 92.08 92.11 92.14 92.17 92.20 92.23 92.26 92.29 92.327.41% 89.45 89.48 89.51 89.54 89.57 89.60 89.62 89.65 89.68

101.11 3.43% 3.53% 3.62% 3.72% 3.82% 3.91% 4.01% 4.10% 4.20%0.513 91.70 93.70 95.81 98.04 100.40 102.91 105.58 108.43 111.470.613 91.86 93.86 95.97 98.21 100.58 103.09 105.77 108.62 111.660.713 92.02 94.02 96.14 98.38 100.76 103.27 105.95 108.81 111.860.813 92.18 94.19 96.31 98.55 100.93 103.45 106.14 109.00 112.05

Beta 0.913 92.34 94.35 96.48 98.72 101.11 103.63 106.32 109.19 112.241.013 92.50 94.51 96.64 98.89 101.28 103.81 106.50 109.37 112.441.113 92.66 94.68 96.81 99.06 101.45 103.99 106.69 109.56 112.631.213 92.82 94.84 96.97 99.23 101.63 104.17 106.87 109.75 112.821.313 92.97 95.00 97.14 99.40 101.80 104.34 107.05 109.94 113.01

101.11 6.61% 6.71% 6.81% 6.91% 7.01% 7.11% 7.21% 7.31% 7.41%3.43% 104.31 101.04 97.97 95.07 92.34 89.75 87.30 84.97 82.773.53% 106.95 103.50 100.26 97.22 94.35 91.64 89.07 86.64 84.343.62% 109.75 106.11 102.69 99.49 96.48 93.63 90.94 88.40 86.003.72% 112.74 108.88 105.27 101.89 98.72 95.73 92.91 90.25 87.74

CV Growth of NOPLAT 3.82% 115.93 111.84 108.02 104.45 101.11 97.95 94.99 92.20 89.573.91% 119.34 114.99 110.94 107.16 103.63 100.31 97.20 94.26 91.504.01% 123.01 118.37 114.07 110.06 106.32 102.81 99.53 96.44 93.544.10% 126.95 122.00 117.41 113.15 109.19 105.47 102.01 98.75 95.704.20% 131.21 125.90 121.00 116.46 112.24 108.31 104.64 101.20 97.98

WACC

Beta

Risk-Free Rate

Equity Market Risk Premium

CV ROIC

CV Growth of NOPLAT

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 8,876,484Average Time to Maturity (years): 5.20Expected Annual Number of Options Exercised: 1,707,016

Current Average Strike Price: 38.42$ Cost of Equity: 7.41%Current Stock Price: $87.46

2017E 2018E 2019E 2020E 2021EIncrease in Shares Outstanding: 1,707,016 1,707,016 1,707,016 1,707,016 1,707,016Average Strike Price: 38.42$ 38.42$ 38.42$ 38.42$ 38.42$ Increase in Common Stock Account: 65,583,561 65,583,561 65,583,561 65,583,561 65,583,561

Change in Treasury Stock 4,845,000,000 4,845,000,000 4,845,000,000 4,845,000,000 4,845,000,000Expected Price of Repurchased Shares: 87.46$ 93.94$ 100.91$ 108.39$ 116.42$ Number of Shares Repurchased: 55,396,753 51,573,890 48,014,838 44,701,392 41,616,603

Shares Outstanding (beginning of the year) 1,871,000,000 1,817,310,263 1,767,443,390 1,721,135,568 1,678,141,192Plus: Shares Issued Through ESOP 1,707,016 1,707,016 1,707,016 1,707,016 1,707,016Less: Shares Repurchased in Treasury 55,396,753 51,573,890 48,014,838 44,701,392 41,616,603 Shares Outstanding (end of the year) 1,817,310,263 1,767,443,390 1,721,135,568 1,678,141,192 1,638,231,605

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol VCurrent Stock Price $87.46Risk Free Rate 3.03%Current Dividend Yield 0.64%Annualized St. Dev. of Stock Returns 17.86%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 8,876,484 38.42 5.20 51.85$ 460,231,408$ Total 8,876,484 38.42$ 5.20 54.70$ 460,231,408$

Visa Inc. (V) February 17, 2017 - University of Iowa Inc. (V) February 17, 2017 ... transaction...

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Transcript of Visa Inc. (V) February 17, 2017 - University of Iowa Inc. (V) February 17, 2017 ... transaction...