Why Visa's IPO should charge you up

By Michael Brush

The price of a share of credit card giant Visa when it begins trading today: $44.

The opportunity to put the world's best-known financial brand in your portfolio: priceless.

No, Visa (V, news, msgs) won't steal the signature ads of archrival MasterCard (MA, news, msgs) when it goes public. But it might want to because:

• The deal represents a rare chance for investors to buy into a new stock that's also one of the world's most recognized names -- one they probably carry in their wallets. (There are more than 1.5 billion Visa cards in circulation.)

• Investors should get a decent price because Visa's owners are launching this massive initial public offering in such a weak market.

• Large IPOs -- and this will be the biggest ever in the U.S. -- typically don't rocket higher the moment they start trading. So investors won't need an exclusive brokerage account to get a deal on shares ahead of time, as with most IPOs. They can buy after it begins trading. To see if you can get shares ahead of the IPO, check with your broker -- some oblige, some don't.

• The obvious comparison is to MasterCard, which is up 300%-plus since its 2006 IPO. But beware: Don't buy Visa expecting a repeat of the phenomenal gains in MasterCard. For reasons we'll get to in a moment, MasterCard was underpriced when it first came out.

Still, I think you could still see Visa shares advance 50% in a year or a little more, thanks to a combination of strong revenue gains and cost cutting.

After a strong market day yesterday, Visa priced its shares at $44, above the expected range of $37 to $42. That raises $17.9 billion, making it the richest U.S. IPO ever.

Why an IPO in this market?

Visa picked a rough time for an IPO. The major indexes have been trading down 10% in 2008, and IPOs have fared worse -- down 18%, according to Renaissance Capital, a Greenwich, Conn., firm that specializes in IPOs.

And Visa is trying to sell nearly a half-billion shares, so shares will need to be priced to move. "I think there will be an effort made to make sure investors get a price they feel comfortable with," says Kathy Smith of Renaissance Capital.

So why now? Blame it on the credit crunch.

The list of Visa owners that'll gain from the IPO reads like a who's who of banks infected by subprime-debt problems. They include JPMorgan Chase (JPM, news, msgs), Bank of America (BAC, news, msgs), Citigroup (C, news, msgs), US Bancorp (USB, news, msgs) and Wells Fargo (WFC, news, msgs). They'll get $10.2 billion out of the deal -- sorely needed capital at a time when big write-downs plague their balance sheets. A Visa IPO won't solve their problems, but it will help their financial strength.

A cut off the top

Sellers also know they can catch an updraft from the powerful performance of MasterCard in this depressing environment for stocks. Since last summer, when financial stocks in particular began to fall apart, MasterCard has gained 15%.

The stocks of rival card companies American Express (AXP, news, msgs) and Discover Financial Services (DFS, news, msgs) are down 34% and 50%, respectively.

MasterCard outshines these rivals in part because of how it makes money. And Visa makes its money the same way.

Unlike American Express and Discover, MasterCard doesn't lend money. So its stock isn't getting punished because of fears about loan losses when people can't pay their bills. It makes money by processing transactions, taking a little piece of every purchase. This means that when consumers trade down to hamburger from steak, MasterCard still gets a piece of the action. So does Visa.

• Video: Does the Visa IPO signal a 2008 turnaround?

Visa is also riding several trends that should bring annual revenue growth of 11% to 15% for years to come, the company says, and it can cut costs for even bigger profit growth. "This is a good company, it is in a great space, and they are the market leader," says Jay Wong, a co-portfolio manager of the Payden U.S. Growth Leaders Fund (PUGLX), which owns shares of MasterCard.

Here's a closer look at those key trends:

Plastic, not paper

More people are using plastic instead of cash or checks, even for basics such as food and gasoline. Since 1992, the number of transactions done each year on credit and debit cards has grown by double digits in the U.S., says JPMorgan analyst Tien-tsin Huang.

These trends should continue, supporting transaction growth in the low double digits for the next several years. Visa, for example, processed 9.1 billion transactions in the fourth quarter of last year, an increase of 13% despite the economic slowdown.

"Visa has a pretty powerful business as people continue to shift away from cash and towards payment with cards, and as e-commerce grows," says Nick Einhorn, a research analyst with Renaissance Capital.

Continued: International growth

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