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Visa Inc.
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== Financials == '''Discounted Free Cash Flow to Firm Method''' The DCFF is a forward-looking valuation approach. Therefore, in order to derive the target price, several assumptions have been made in the three main pillars that sustain this method: Free cash flows – the 2020 – 2022 data is based on Visa Inc annual report and the data onward is based on the historical growth rate. To forecast the free cash flow, we made the following assumptions based on our analysis: * Revenue: were forecasted on the past 3 year’s sales growth % with an average of 13.94% in 2023 and increasing to 16.33% in 2027, reaching USD $62B. * EBIT Margin: the historic average EBIT margin was 68%, therefore for the purpose of calculating the FCF, an average of 68% EBIT margin is used. * Depreciation and Amortization: Inline with the historic growth rate, depreciation and amortization expenses are increasing by an average 3.17%. * Capex: As an asset light model, Visa is expected to keep about 11.42% of revenues as capital expenditures (CAPEX) in the future. The company’s capex was about 12.53% of the revenues in 2020 but has decreased to 11% in and 2022. As Visa is expecting to continue investing in technology assets and payments system infrastructure, as well as revenue is expected to increase, CAPEX is assumed to represent 11.42%. * Net change in working capital: Visa is managing its liquidity risk by investing excess cash in securities that enable the company to meet its working capital and liquidity needs, and earn additional income. The current assets are expected to increase by 9.4% and current liabilities to increase by 24%. Current Assets and Current Liabilities were forecasted for each year based on the historic data, and their difference representing the NWC for each year. [[File:Table 1- Visa Inc Unlevered Free Cash Flow .jpg|center|thumb|824x824px]] '''WACC''' The Weighted Average Cost of Capital serves as the discount rate for calculating the terminal value based of the following assumptions: * The risk-free rate (4.12%) was assumed to be the 5-year US treasury. * The beta (0.97) is the 5-year monthly historical beta of Visa and shows that Visa has almost the same sensitivity as the market. * The cost of equity (11.48%) was calculated using the capital asset pricing model (CAPM). * The market return (11%) is taken to be the 10-year average return of the S&P 500, where Visa is listed. * The cost of debt (2.4%) is estimated as interest expense divided by total debt, as actual cost of debt was not stated in the company’s annual report. [[File:WACC.jpg|center|thumb|609x609px]] '''Terminal value''' The terminal value was derived considering a long-term growth in perpetuity of 2.9%, which is based on the US expected GDP rate. I have assumed Visa remains a large stable market cap company with stable earnings and contributing to 2% of the overall growth in the US economy. Based on the growth rate and the WACC rate, the present value of Terminal Value for the company was determined to be $362m. [[File:Oo.jpg|thumb|480x480px]] '''Equity value''' Based on the analysis the equity value of the company is $398m. Given the total shares outstanding of 1,096 million, implied share price $363. Based on this valuation and relative to the actual share price of $240, the company is undervalued and a buy recommendation is issued. '''Multiple Valuation:''' In addition to the DCF, a multiples valuation analysis was conducted to see if it supports my conclusions from the DCF. The closest competitors were selected in order to obtain the multiples. The multiple valuation shows that with the current price being $240, all valuations methodologies suggest that Visa Inc is undervalued compared to its competitors. [[File:Multiple.jpg|center|thumb|438x438px]]
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