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Warren Buffett’s Berkshire Hathaway holding company owns many stocks across multiple sectors. However, even the famed investor himself would probably point to a few companies he likes more than others. One of those is Visa (V -0.63%). To me, this stock his company owns has strong potential for 2023.
Visa outperformed the market this year, with the stock down 5% in 2022 versus the broader market’s 18% loss (as gauged by the S&P 500). However, multiple catalysts exist in the payments processing giant that could drive Visa to outperform the market again in 2023.
Visa’s business model isn’t that hard to understand: It issues credit and debit cards on behalf of banks and runs a payment processing network, charging a small fee each time its cards are used. This toll booth model creates impressive margins, with Visa’s profit margins regularly coming in above 50%.
V Profit Margin data by YCharts
This generates massive amounts of cash, which Visa uses to reward shareholders through dividends and stock buybacks. In Visa’s fourth quarter (ending Sept. 30), it repurchased $2.1 billion in stock and paid $800 million in dividends. That’s basically 50% of Visa’s free cash flow, giving it plenty of room to increase its buyback plan and ramp up dividends. With Visa’s newly authorized $12 billion share repurchase plan, it will do just that.
Visa’s responsible use of capital and strong margins are some of the reasons Buffett owns the stock, which is vital for the company’s long-term performance. However, some near-term catalysts could affect Visa in 2023.
If you look at Visa’s price-to-earnings valuation, it’s trading at a significant discount to its decade-long average.
V PE Ratio data by YCharts
While Visa doesn’t need to return to its average instantly, its earnings growth will translate into stock appreciation even if the stock stays at its current valuation levels. And looking ahead, Wall Street analysts project it to be strong.
Data source: Visa and Nasdaq. YOY = year-over-year. EPS = earnings per share.
So if Visa meets these projections and its valuation stays the same, the stock should appreciate at the same pace as earnings growth. Throw in dividends, and Visa sets the stage for a stock that won’t just beat the market; it will stomp it.
However, one factor might give investors some pause: a potential recession. If consumers quit spending, Visa’s revenue stream will slow, and the company will struggle. But, unlike many other companies, management doesn’t see a recession happening anytime soon.
On its conference call, Visa’s management stated they didn’t factor an economic recession into their projections. It’s not that they think one won’t happen, but they aren’t changing their plans just because one may occur. Visa is focused on the medium and long term, which is the only time frame investors like Buffett (and myself) care about.
With Visa focused on the long term and the stock set up for short-term success with its historically cheap valuation, 2023 looks like another market-beating year for Visa. That makes me very bullish on the stock, and while Buffett trimmed some of his position in 2021, I wouldn’t be surprised if he repurchased some shares in 2023.
Keithen Drury has positions in Visa. The Motley Fool has positions in and recommends Berkshire Hathaway and Visa. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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