HL SELECT UK GROWTH SHARES
New Holding - Visa
9 January 2020
We recently added a new holding in Visa Inc, the US-listed card and electronic payments network to the HL Select UK Growth Shares fund.
Visa is the fourth international stock to be added to the fund (the others being LVMH, Adobe and Autodesk). Widening our search globally gives us more exceptional businesses to choose from, and greater access to certain industries and sectors that aren’t as well represented in the UK market. Our total exposure to international names now equates to around 14% of the portfolio, which is close to our maximum allowed limit of 20% in overseas-listed companies.
Visa’s position in the world of electronic payments is unparalleled.
It processes roughly twice as many transactions as its closest competitor, Mastercard, and holds over 50% market share (by purchase volume) in the U.S., Europe, Latin America, and the Middle East/Africa.
This dominance is reinforced by a powerful network effect. The more consumers that are plugged into a payment network, the more attractive that payment network becomes for retailers, which in turn makes the network more convenient for consumers. It’s exactly the sort of virtuous cycle we look for.
The growth prospects for Visa and Mastercard look very strong indeed. Despite rapid growth in digital payments over the last decade, cash is still the most established way to pay in the world. Even in Europe cash represents 78.8% of all transactions in volume and 53.8% in value, suggesting the shift from cash and cheques towards electronic payments still has many years left to run.
Unlike banks, Visa doesn’t take on any credit risk because it’s just facilitating the transaction. Every time a transaction passes through its network, it takes a tiny slice. The more transactions flowing through its network, the more money Visa makes; yet the costs of operating the network are largely fixed. This makes the business enormously scalable leading to very high margins and cash flows.
Replicating Visa and Mastercard’s global payments network would be extremely challenging. For this reason the majority of new payment models are choosing to partner with the card networks, rather than bypass them. So whether you’re paying by phone, card or online; it’s likely that either Visa or Mastercard are taking a cut.
We aren’t the only investors to have noticed these qualities, meaning Visa’s shares do not come cheap (trading on a forward P/E of 29x). But the valuation is lower than that of Mastercard (on 33x earnings) and in our view is fully justified given the prospect of double-digit earnings growth.
A full rationale for all of our holdings can be viewed on the portfolio breakdown page.for more information. Unless otherwise stated performance figures are from Bloomberg and estimates, including prospective yields, are a consensus of analyst forecasts from Bloomberg. They are not a reliable indicator of future performance. Yields are variable and not guaranteed.