Visa IPO is everything managers want it to be

U.S. equity managers view Visa Inc.'s initial public offering as a chance to grab a stock in the financial sector that is not weighed down by the credit crunch.

San Francisco-based Visa generates its profits from transactional fees, not by issuing credit, and transactional fees hold up in even the slowest economies as more consumers make purchases us-ing their debit and credit cards, invest-ors said.

“You have a massive move right now from paper money to plastic and electronic money,” said David Siino, a director and analyst for U.S. equity at Epoch Investment Partners Inc., New York. “Visa and MasterCard own a bridge, and any time you cross the bridge, you pay them the toll.”

Visa's stock is scheduled to go public March 19, with 406 million shares selling at an estimated share price of between $37 and $42. Underwriters may purchase another 40.6 million shares, according to the company's S-1 filing, putting a total value on the offering near $19 billion, making it the largest IPO in U.S. history.

Portfolio managers are still researching the company and haven't made final decisions on how much Visa stock to request, but analysts said they like the company's growth potential abroad and its ability to hold up in a weak market.

“What's most exciting is the international opportunity,” said David Honold, a security analyst/ portfolio manager with Turner Investment Partners Inc., Berwyn, Pa.

Emerging countries that have faster economic growth rates than the U.S. or Europe will give Visa higher transaction rates and higher adoption rates of new credit and debit cards, Mr. Honold said.

For the 12 months ended June 30, Visa processed payments totaling $1.83 trillion in the U.S., up 10% from the prior year. But in the rest of the world, Visa processed payments totaling $1.65 trillion, up 24% from the prior 12 months.

Visa should only continue to see growth abroad as people in other countries that were just issued their first debit or credit cards get more familiar with them.

“Non-U.S. growth is coming from new cards being issued. Fifteen years from now they're going to be as comfortable as an American, charging away,” said Dan Chung, chief executive officer and chief investment officer at New York-based Fred Alger Management Inc.

Those transaction rates will increase even if the global economy slows, said E. Keith Wirtz, president and chief investment officer of Cincinnati-based Fifth Third Asset Management Inc.

He said when the economy slows, people might spend less but they still make the same number of purchases. “I'm less concerned if it's a Tiffany's charge or a Wal-Mart charge, as long as there's a charge.”

He added that consumers often make more transactions in a slower economy, but just make smaller transactions each time. “It's almost recession resistant,” Mr. Wirtz said of the Visa stock.

Even if the number of transactions decreased in a slower economy, Turner's Mr. Honold said, the company has some protection. If merchants experience a slowdown in transactions, they have to pay Visa more for the amount of transactions they do process.

Opinions varied on how well the stock is priced and how it will fare after the IPO.

“Right now it's coming in at a discount so it's more attractive than MasterCard,” said Jim Albers, an analyst supporting several equity strategies at Victory Capital Management Inc., Cleveland.

He said he is classifying Visa as a growth stock because so many more people will be using Visa debit cards in the future as emerging market economies grow and electronic payments continue to replace cash.

Epoch's Mr. Siino said the IPO is attractively priced. “You usually have the built-in 15% to 20% IPO discount. This seems to be even below that,” he said.

Mr. Siino is still determining what price Epoch officials would be willing to pay for additional shares after the stock starts trading.

“I'm guessing this thing will take off like a rocket. We have to get an idea of what the sane price is and not pay too much for it,” he said. “You hope to get as much as you can in the IPO range but if it shoots up, you need to establish where to stop purchasing.”

While Fifth Third's Mr. Wirtz said he anticipates his firm will be a big buyer of Visa shares, he predicts the stock “won't go as fast out of the gate” as MasterCard Inc. did when it issued an IPO in May 2006.

MasterCard stock initially sold for $40.30. Six months later, the stock closed at $105.48; it closed at $194.70 on Feb. 28.

He also thinks the Visa stock won't be discounted heavily because investment bankers will be able to use MasterCard as a reference point.

In this market, most investors will want to buy the Visa IPO because it is a financial stock with a positive story, Mr. Wirtz said. Bankers are aware of that demand and so they will not have to discount the stock much during the IPO, Mr. Wirtz added.

“Because MasterCard was the first to go (public), the price of the deal for Visa won't be as cheap and won't be quite the surprise,” he said.