Offshore

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⁠Dimitry Nakhla | Babylon Capital®
Less than 8 months ago I stated:

“Today at $254💵 $V appears to be ONE OF THE BEST RISK-REWARD opportunities in today’s market & a strong consideration for investment”

Since then, $V stock rallied +42% ✅ — Also, that was essentially the lowest price that $V traded for moving forward 🎯

As I stated in the post attached below 👇🏽

“As you can see, $V appears to have attractive return potential EVEN if we assume >25x earnings, a multiple well-below its 10-year mean & more importantly — a multiple justified by its growth rate AND quality

I consider $V one of the best businesses in the world & as Warren Buffett says:

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”

$V is even trading at a valuation better than just a fair price”
___

I do not throw words around carelessly. When I called $V “one of the best risk-reward opportunities in today’s market,” I meant every bit of it.

Since then, $V has delivered ~5x the return of $SPY and has climbed in price with impressive consistency.

Yes, I can understand that the allure of growth stocks & making quick gains may entice you. Yet, you cannot tell me that there is something better than generating >40% return, in less than a year, while being an owner of the world’s highest-quality business.

Best of all, you can hold $V without losing sleep or constantly checking its price.

A sober valuation analysis on $V 🧘🏽‍♂️

•NTM P/E Ratio: 23.73x
•10-Year Mean: 28.11x

•NTM FCF Yield: 4.20%
•10-Year Mean: 4.08%

As you can see, $V appears to be trading below fair value

Going forward, investors can receive ~18% MORE in earnings per share & ~3% MORE in FCF per share 🧠***

Before we get into valuation, let’s take a look at why $V is a super business

BALANCE SHEET✅
•Cash & Short-Term Inv: $16.64B
•Long-Term Debt: $20.60B

$V has a great balance sheet, an AA- S&P Credit Rating, & 31x FFO Interest Coverage Ratio

RETURN ON CAPITAL✅
•2019: 27.5%
•2020: 21.4%
•2021: 24.2%
•2022: 30.7%
•2023: 33.7%
•LTM: 35.7%

RETURN ON EQUITY✅
•2019: 35.2%
•2020: 30.7%
•2021: 33.4%
•2022: 40.9%
•2023: 46.5%
•LTM: 48.5%

$V has strong return metrics, highlighting the financial efficiency of the business

REVENUES✅
•2013: $11.78B
•2023: $32.65B
•CAGR: 10.73%

FREE CASH FLOW✅
•2013: $2.55B
•2023: $19.70B
•CAGR: 22.68%

NORMALIZED EPS✅
•2013: $1.90
•2023: $8.77
•CAGR: 16.52%

PAID DIVIDENDS✅
•2013: $0.35
•2023: $1.87
•CAGR: 18.24%

SHARE BUYBACKS✅
•2013 Shares Outstanding: 2.62B
•LTM Shares Outstanding: 2.03B

By reducing its shares outstanding 22.5%, $V increased its EPS by 29% (assuming 0 growth)

MARGINS✅
•LTM Gross Margins: 97.8%
•LTM Operating Margins: 66.9%
•LTM Net Income Margins: 53.9%

***NOW TO VALUATION 🧠

As stated above, investors can expect to receive ~18% MORE in EPS & ~3% MORE in FCF per share

Using Benjamin Graham’s 2G rule of thumb, $V has to grow earnings at an 11.87% CAGR over the next several years to justify its valuation

Today, analysts anticipate 2024 - 2026 EPS growth over the next few years to be slightly more than the (11.87%) required growth rate:

2024E: $9.92 (13.1% YoY) *FY Sep
2025E: $11.09 (11.8% YoY)
2026E: $12.57 (13.3% YoY)

$V has an excellent track record of meeting analyst estimates ~2 years out, so let’s assume $V ends 2026 with $12.57 in EPS & see its CAGR potential assuming different multiples

28x P/E: $351.96💵 … ~16.4% CAGR

27x P/E: $339.39💵 … ~14.5% CAGR

26x P/E: $326.82💵 … ~12.6% CAGR

25x P/E: $314.25💵 … ~10.8% CAGR

As you can see, $V appears to have attractive return potential EVEN if we assume >25x earnings, a multiple well-below its 10-year mean & more importantly — a multiple justified by[...]

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