Goldman Sachs Makes Visa a Top Pick After Visa Europe Purchase

As I like to say, confirmation bias at its best. Visa is holding in our dividend growth portfolio and the subject of the 11th edition of the AMM Dividend Newsletter. One of the catalysts we highlighted would be the purchase of Visa Europe.

Integrating the two systems and transferring Visa Europe users over to Visa’s network would take time but the profits are worth it. Europe is seeing the same type of growth in the use of debit cards, credit cards, and smartphones as discussed above and payment volumes are expected to reach $3.73 trillion by 2016. Visa would greatly benefit by having this growing transaction volume over its network and not on a licensee’s. Also, Visa Europe’s operating margin is around 23% compared to Visa’s 62%. Even though European financial regulations will make it tough for an integrated Visa Europe to reach 62% operating margins there is still a lot of room for margin improvement and increased profits for Visa.

Now for the confirmation bias. Goldman Sachs has made Visa a top equity pick in part because of the recent purchase of Visa Europe.

From Barron’s.

Schneider also likes Visa’s acquisition of Visa Europe, announced last month. In this week’s Barron’s cover story, Goldman’s David Kostin recommended Visa, arguing that the Visa Europe acquisition will help Visa capture the accelerating shift toward electronic payments in the continent. Visa is up 5% since this column praised the Visa Europe deal. In that time, the Standard & Poor’s 500 has lost 2.9%.

“The acquisition of Visa Europe will enable Visa to expand margins in this region through a combination of pricing and cost improvements after a period of initial investment,” wrote Guggenheim’s Eric Wasserstrom, who raised his target price to $88 just after the news.

Barclays’ Darrin Peller estimates that the deal will bring a minimum of 10% EPS accretion by 2020.

Improving Vise Europe’s operations and margins combined with the secular shift towards electronic payments will provide a boost to Visa’s future earnings and dividend growth.