Investment Activity Review-April 2014

During April I made a decision to sell my position in Toyota Motors (Ticker: TM and IBM. In the last while I have been engaged in some projects that indirectly involve both companies. The nature of the work would have forced me to disclose my positions in those companies and continuing to hold the shares could have potentially put me into a conflict. Instead, I decided to just sell the positions and move on. There are over 12,000 publicly traded companies in the world, so I am not married to these two companies. As you can see below, I have found others! I still think they are wonderful companies and maybe sometime in the future, I could own them again.

Opened Position in Visa (V)
Visa is the largest retail electronic payments network based on payments volume, total volume and number of transactions. Visa is also one of the most recognizable brands in the world. What is unique about Visa is that they are a financial services company but they have next to no debt. Their balance sheet is very rock solid. Basically they generate a ton of cash and because of their network a high level of durable competitive advantage. Below is Valuentum’s quick take. They sum it up quite nicely:


“Visa benefits from two fantastic competitive advantages: a network effect and costly initial investment. The network effect is incredibly strong for Visa. As of its last update, the firm has more than 2 billion cards outstanding accepted by retailers across the world. The number is roughly double the number of Mastercards (MA) and over 20 times the amount of American Express (AXP) cards outstanding. This network effect took years, as well as billions of dollars to create—something that won’t easily be replicated by any new entrant. Adjusted earnings per share in Visa’s first quarter advanced 15% thanks to a 9% constant-currency increase in net operating revenue, which itself was driven by solid growth in service revenues, data processing revenues, and international transaction revenues. Though the firm said revenue growth would slow as a result of sanctions imposed on Russia (RSX) and a stronger dollar, we think this is merely transient and immaterial to the long-term trajectory of Visa’s franchise. We especially like that Visa does not take on credit risk. ”

The stock was trading in the high $220’s which I thought was too expensive. I thought that if the stock would fall back to the $200’s and the fundamentals remained intact, I would jump aboard. Sure enough the stock came back. I bought a position at the $201 level. From a discount cash flow valuation, the stock appears to have an intrinsic value in the range of $235 to $280. The firm’s return on invested capital has grown from 11 percent in 2011 to 25 percent in the recent 2013 fiscal. With a cost of capital in the 11 percent level, the company is creating tangible wealth for its shareholders. There are threats. Payment systems are springing up everywhere and some companies are trying to create their own payment “wallet”. The big question is will consumers prefer to have a smartphone full of payment apps or rely on one format for payment. I think that because of its vast network that is well entrenched globally, as well its well established brand, that it can withstand such pressures and position itself as one of the core payment systems globally. Like anything I’m buying these days, I’m buying small positions. Visa like other stock is ripe to get thrown out with the bath water when a major market correction arrives, valuation be damned as we learned in 2008–09. As a result, I would not hesitate to add more to the position if the fundamentals remain intact.