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    Matthew Hall



      3M Innovation by Matt Hall and Dave Gregory
   Overview                            VISA: Overview
    Thesis

Business Model
                 •Operates world’s largest retail electronic payments network

    Industry
                 •Leader in debit/credit cards in circulation, most transactions,
    Clients      and most volume of any payment network providers
    Internal

  Future Dev.    •16,600+ clients globally (primarily financial institutions)

Economic Moat

   Valuation
                 •Retail service business, not financial services business

 Risk Factors
                 •TTM revenues of $7.1b and Market Cap of $52b
  Conclusion

                                 3M Innovation VISA– Matthew Hall
                                               by Matt Hall and Dave Gregory
   Overview                         Investment Thesis
    Thesis
                 •VISA is not a financial services company, but rather a retail
Business Model
                 service provider
    Industry     •as long as people purchase things, VISA has a market
    Clients      •Economic Moat:
    Internal         •Incumbent in market w/ oligopolistic characteristics

  Future Dev.        •Unsurpassed network infrastructure leading to significant
                     operational efficiencies (competes on cost – see operating
Economic Moat        margins) and value added services
   Valuation         •Critical mass globally (brand already est. in huge growth
                     industry)
 Risk Factors
                     •Minimal Capex req’d for substantial incremental sales
  Conclusion

                                 3M Innovation VISA– Matthew Hall
                                               by Matt Hall and Dave Gregory
   Overview                           Business Model
    Thesis
                 •Electronic payment networks offer services to facilitate payments
Business Model
                 and transfers of value between financial institutions
    Industry     •Revenues from various “value-added” services and products:
    Clients          •Services (payments by customers participating in VISA card
                     program – consumer credit, consumer deposit access,
   Internal
                     commercial)
  Future Dev.        •Data processing fees
Economic Moat        •International
   Valuation         •Other (option services, i.e. concierge)

 Risk Factors    •Relationship w/ VISA Europe: trademark/tech licenses & bilateral
                 services (quarterly fees tied to EU GDP growth)
  Conclusion

                                 3M Innovation VISA– Matthew Hall
                                               by Matt Hall and Dave Gregory
   Overview
                               The Global Environment
     Thesis

Business Model   •On-going 30 yr shift from paper to electronic and card payments

   Industry      •Consumer shift  growing merchant acceptance
                     •Think globally, not NA
    Clients
                 •Relatively new trend in emerging economies
    Internal
                     •Acceleration from rising incomes, globalization of commerce
  Future Dev.        and increased travel
Economic Moat    •Going Fwd: expected double digit growth in global card purchase
                 transaction volume through 2012
   Valuation

 Risk Factors

  Conclusion

                                3M Innovation VISA– Matthew Hall
                                              by Matt Hall and Dave Gregory
   Overview
                                  Industry Economics
     Thesis

Business Model   •Volume drives growth – how to achieve?

   Industry      •Implication: VISA’s network dynamics facilitate both
                 components of driving volume
    Clients

    Internal

  Future Dev.

Economic Moat

   Valuation

 Risk Factors

  Conclusion

                                 3M Innovation VISA– Matthew Hall
                                               by Matt Hall and Dave Gregory
   Overview                 Electronic Network Jargon
     Thesis
                   •Cardholder – purchaser
Business Model     •Merchant – retailer
                   •Acquirer – retailer’s financial institution
   Industry
                   •Issuer – cardholder’s financial institution
    Clients        •Authorization, clearing & settlement – instantaneous
                   process
    Internal                                                             Clearing

  Future Dev.

Economic Moat

   Valuation

                 Authorization                                                      Settlement
 Risk Factors

  Conclusion

                                 3M Innovation VISA– Matthew Hall
                                               by Matt Hall and Dave Gregory
   Overview                Open Loop Business Model
     Thesis
                           Open Loop                             Closed Loop
Business Model      Visa                                    Amex
                    Mastercard                              Discovercard
   Industry
                    Multi-party system                      Responsible for
    Clients
                     connecting financial                     providing all products
                     institutions (manages flow               and services to
    Internal         of information)                          cardholder &
                    Depends on FI clients to                 merchant
  Future Dev.        provide products and                    Allows more control
Economic Moat
                     services directly to                     over system
                     cardholder (price                       Recently begun
   Valuation         discrimination)                          emulating open loop
                    Allows for concentration on              system
 Risk Factors        more profitable activities
  Conclusion

                              3M Innovation VISA– Matthew Hall
                                            by Matt Hall and Dave Gregory
   Overview                                 Competition
     Thesis
                 •Includes all electronic payment networks and all forms of non-
Business Model
                 electronic payment (product substitute)
   Industry
                                           All Figures in Billions
    Clients
                                          VISA        MC      AMEX      DISC          JCB     Diner's
    Internal     Payment Volume            $2,127 $1,417        $556        $96        $63        $22
                 % Market                 49.7% 33.1% 13.0%                2.2%       1.5%       0.5%
  Future Dev.    Total Volume              $3,230 $1,922        $562       $114        $70        $22

Economic Moat    % Market                 54.6% 32.5%           9.5%       1.9%       1.2%       0.4%
                 Transactions                 44.0     23.4       4.5           1.4     0.7        0.1
   Valuation     % Market                 59.4% 31.6%           6.1%       1.9%       0.9%       0.1%
                 Cards                     1254.0     817.0      78.0       57.0       59.0        7.0
 Risk Factors
                 % Market                 55.2% 36.0%           3.4%       2.5%       2.6%       0.3%
  Conclusion

                                  3M Innovation VISA– Matthew Hall
                                                by Matt Hall and Dave Gregory
   Overview                                    Clients
     Thesis
                 •Major financial institutions globally
Business Model
                     •Implication: financial consolidation has not hurt VISA so far
    Industry         (see: JP Morgan Chase)
    Clients

    Internal     •2/3rd of clients have been w/ VISA for 10+ yrs

  Future Dev.        •Implication: globalization of financial products will help VISA
                     enter new markets going fwd
Economic Moat

   Valuation

 Risk Factors

  Conclusion

                                  3M Innovation VISA– Matthew Hall
                                                by Matt Hall and Dave Gregory
   Overview
                               VISA Payment Network
     Thesis

Business Model   •Scalable global processing platform (capacity: 478 billion
                 transactions annually) – limited growth & maintenance CAPEX
    Industry     req’d
    Clients      •Centralized processes & operational savings
    Internal     •Supplementary products: risk mgmt/security, info services,
                 dispute mgmt, etc.
  Future Dev.
                 •Centralized vs. Distributed architecture: real time information
Economic Moat

   Valuation

 Risk Factors

  Conclusion

                                 3M Innovation VISA– Matthew Hall
                                               by Matt Hall and Dave Gregory
   Overview
                                         Management
     Thesis

Business Model   •Understands industry

    Industry     •Conservative (clean capital structure)
                 •Well laid out growth strategy (evidenced by IPO and re-org)
    Clients
                 •Joseph Saunders, CEO
    Internal
                     •Sets tone for sr. mgmt
  Future Dev.
                     •Career financial services mger including: MasterCard,
Economic Moat        Providian, WaMu, Fleet Card Services and most recently
                     VISA International
   Valuation

 Risk Factors

  Conclusion

                                  3M Innovation VISA– Matthew Hall
                                                by Matt Hall and Dave Gregory
   Overview
                                Future Developments
     Thesis
                 •Increased international spending (40% and rising)
Business Model
                 •Increased use of “plastic” for non-discretionary
    Industry
                 •Product customization (attractive in new markets)
    Clients
                 •Continued product innovation (contactless payment methods,
    Internal     mobile payments, chip cards)

  Future Dev.    •Growth of merchant networks through incentives (~28m)
                 •Bottom line: huge growth potential requiring minimal CAPEX
Economic Moat

   Valuation

 Risk Factors

  Conclusion

                                 3M Innovation VISA– Matthew Hall
                                               by Matt Hall and Dave Gregory
   Overview
                                      Economic Moat
     Thesis

Business Model   •Starting position (incumbent in oligopoly)

    Industry         •Critical mass w/in industry
                     •Network size makes VISA industry leader in price and
    Clients
                     value (service offerings: risk mgmt, incentives, real-time
    Internal         information, etc.)

  Future Dev.    •Comprehension of market economics
                 •Open loop model/centralized architecture allow for flexibility at
Economic Moat
                 institutional level
   Valuation
                 •Huge CAPEX requirement to enter industry and yrs to develop
 Risk Factors    client relationships & industry comprehension VISA has

  Conclusion

                                  3M Innovation VISA– Matthew Hall
                                                by Matt Hall and Dave Gregory
   Overview                 Valuation – Multiples
     Thesis
                 •Generally useful to compare the relative value of
Business Model
                 companies
    Industry         •i.e., “the market” is willing to pay x for $1 of VISA
                     earnings vs. y for $1 of Mastercard’s earnings
    Clients
                 •VISA has very few comps and very few public filings for
    Internal
                 historical comparisons
  Future Dev.        •Comps are not useful in this case given VISA’s capital
                     structure, earnings history and lack of appropriate
Economic Moat
                     comparable businesses
   Valuation

 Risk Factors

  Conclusion

                               3M Innovation VISA– Matthew Hall
                                             by Matt Hall and Dave Gregory
   Overview                              Valuation – DCF
                                                    2009E        2010E           2011E           2012E          Terminal
     Thesis
                 Revenue                        $    8,292   $    9,536       $ 10,966        $ 12,611      $     13,241
                 Growth Rate                         15%          15%               15%               15%            5%
Business Model
                 EBIT                           $  3,317     $    3,814       $    4,386      $    5,297    $      5,561
                 EBIAT                          $  2,073     $    2,384       $    2,741      $    3,310    $      3,476
    Industry     (+) D&A                        $  50.00     $ 100.00         $ 150.00        $ 175.00        $        -
                 (-) Capex                      $ 450.00     $ 450.00         $ 328.98        $ 378.32        $        -
    Clients      (-) Change WC                  $ 853.13     $ 591.58         $ 281.85       $ (71.50)      $    (23.83)
                 FCFF                           $ 819.82     $ 1,442.31       $ 2,280.65      $ 3,178.51     $ 3,499.68
                 Terminal Value                                                                             $ 122,488.84
    Internal
                 Discounted FCFF                $ 759.10     $ 1,236.55       $ 1,810.45     $ 2,336.30     $ 83,363.85
                                                                                                            $ 91,386.31
  Future Dev.
                 Enterprise Value                $ 91,386                 Current Market Cap                $    53,930
                 (-) Debt                       $    (109)                Shares Outstanding                      1,080
Economic Moat    (+) Cash                       $    6,239                Current Share Price               $     49.75
                 Equity Value                    $ 97,516                 Intrinsic Value Per Share         $     90.29
   Valuation                                                              Intrinsic Value Premium                  81%
                 Stage One Growth Rate             15.0%
                 Terminal Growth Rate               5.0%
 Risk Factors    Stage One Capex                 $    450
                 Terminal Capex                     3.0%
                 Tax Rate                          37.5%
  Conclusion     WACC                               8.0%


                                         3M Innovation VISA– Matthew Hall
                                                       by Matt Hall and Dave Gregory
   Overview                           Valuation – DCF
     Thesis                         Terminal Growth Rate vs. Stage One Growth Rate
                 $ 94,228.78           13.0%         14.0%         15.0%        16.0%           17.0%
                         4.0%   $     69,608 $      71,084 $      72,586 $     74,114     $    75,668
Business Model           4.5%   $     78,456 $      80,143 $      81,860 $     83,607     $    85,383
                         5.0%   $     90,257 $      92,226 $      94,229 $     96,266     $    98,339
                         5.5%   $    106,782   $  109,145    $   111,549  $   113,994     $   116,482
    Industry             6.0%   $    131,574   $  134,528    $   137,534  $   140,591     $   143,702


    Clients                             Terminal Growth Rate vs. Cost of Capital
                 $ 94,228.78             7.0%          7.5%          8.0%          8.5%          9.0%
                         4.0%   $     96,760 $      82,934 $      72,586 $       64,556   $    58,148
    Internal             4.5%   $    114,587  $     95,482 $      81,860 $       71,664   $    63,752
                         5.0%   $    141,333  $    113,053  $     94,229 $       80,806   $    70,759
  Future Dev.            5.5%   $    185,917  $    139,415  $    111,549   $     92,999   $    79,772
                         6.0%   $    275,096  $    183,359  $    137,534   $   110,072    $    91,792

Economic Moat
                                       Terminal Growth Rate vs. Terminal Capex
                 $ 94,228.78             2.0%         2.5%          3.0%         3.5%             4.0%
   Valuation             4.0%   $     75,087 $     73,837 $      72,586 $      71,336     $    70,086
                         4.5%   $     84,718 $     83,289 $      81,860 $      80,431     $    79,003
                         5.0%   $     97,563 $     95,896 $      94,229 $      92,562     $    90,895
 Risk Factors            5.5%   $    115,550  $   113,549  $    111,549   $  109,548      $   107,548
                         6.0%   $    142,535  $   140,034  $    137,534   $  135,033      $   132,532

  Conclusion

                                     3M Innovation VISA– Matthew Hall
                                                   by Matt Hall and Dave Gregory
   Overview                 Alternative Valuation
     Thesis
                 •Assume nominal GDP growth rate
Business Model
                 •Assume stabilized % of global “transfer of value”
    Industry     transactions completed electronically (~150% today)
    Clients      •Three Scenarios
    Internal         •VISA gains relative market share

  Future Dev.        •VISA relative market share stays flat
                     •VISA loses relative market share
Economic Moat
                 •Apply appropriate margins to revenue share to determine
   Valuation
                 VISA terminal FCF
 Risk Factors    •Discount at WACC  sensitivity
  Conclusion

                               3M Innovation VISA– Matthew Hall
                                             by Matt Hall and Dave Gregory
   Overview
                                 Recession Resilience
     Thesis
                 •Always ask: “What’s the downside risk?”
Business Model
                 • 40% (and growing) of revenue generated from non-
    Industry     discretionary spending
    Clients      •2007 re-org offers cost-cutting and price discrimination
                 flexibility
    Internal
                 •~36% of VISA’s cost structure is variable with some discretion
  Future Dev.
                 •Incentive payments (contra rev) decrease in slow down
Economic Moat

   Valuation

 Risk Factors

  Conclusion

                                  3M Innovation VISA– Matthew Hall
                                                by Matt Hall and Dave Gregory
   Overview
                                          Legal Issues
     Thesis

Business Model   •VISA in final stages of comp. payments related to a number of
                 suits filed against it individually or jointly w/ Mastercard
    Industry     (Discover, AMEX, etc.)
    Clients          •Anti-trust issues
    Internal         •Contributed to negative bottom line

  Future Dev.    •VISA cannot restrict network members from offering other
                 cards
Economic Moat
                     •Likely “priced” into market in terms of valuation and
   Valuation         adjusted revenues as a result of increased competition and
                     consumer choice
 Risk Factors

  Conclusion

                                 3M Innovation VISA– Matthew Hall
                                               by Matt Hall and Dave Gregory
   Overview                        Business Risks
     Thesis
                 •Consumer credit risks
Business Model
                      •Not really – no direct risk exposure
    Industry
                      •Debit card business = implicit hedge
    Clients
                 •Interchange rate legislation
    Internal
                      •Managed system volume a competitive advantage?
  Future Dev.    •Anti-trust legislation
Economic Moat         •Size becomes disadvantage
   Valuation     •Increased competition

 Risk Factors    •Solid Balance Sheet

  Conclusion

                                 3M Innovation VISA– Matthew Hall
                                               by Matt Hall and Dave Gregory
   Overview            Conclusion
     Thesis

Business Model

    Industry
                 Buy 40 shares @ $49.75
    Clients

    Internal

  Future Dev.

Economic Moat

   Valuation

 Risk Factors

  Conclusion

                 3M Innovation VISA– Matthew Hall
                               by Matt Hall and Dave Gregory

								
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