Tuesday, March 4, 2008

Should you join the Visa IPO craze?

What to consider before investing
It would be easy to get starry-eyed over Visa Inc.'s plans to go public this month.
The credit-card behemoth -- which processes twice as many transactions as its closest rival, MasterCard Inc. -- is thriving, increasing its fourth-quarter earnings by 70 percent even as other financial-sector institutions watched profits plummet.
If all goes as expected, Visa will be by far the biggest initial public offering in U.S. history, raising $16 billion -- and that's the conservative estimate.
"Yeah," says John Fitzgibbon Jr., founder of IPOscoop.com, "that's going to draw some attention."
But don't let Visa's big name, big earnings and ubiquitous presence lure you into buying its stock without weighing the disadvantages as well. There are good reasons to buy into Visa and other IPOs, and good reasons not to. Here are factors to consider.
Why buy?
Visa has a strong brand name, an established track record and a product that is in demand. Consumers are increasingly willing to put everyday purchases on credit and debit cards: Card payments accounted for 42 percent of all consumer purchases in the U.S. last year, up from 29 percent five years ago, according to the Nilson Report.Visa's business model, it says, protects it from the credit crunch that's hurting the banks that issue its cards, like Charlotte-based Bank of America Corp. and Wachovia Corp. Visa makes its money by charging those banks for transmitting authorization messages every time a consumer uses a credit or debit card. "Whether the person repays the balance is irrelevant to Visa," said Gwenn Bezard, research director at Aite Group in Boston. "That's the problem of the card issuer."
MasterCard, which has a similar business model, has had a wildly successful ride on the stock market. It went public in 2006 at around $40 per share. Now it's trading at almost $200.
Both Visa and MasterCard had strong fourth quarters. Visa increased earnings 70 percent, to $424 million. MasterCard increased earnings more than sevenfold, to $304 million. (In the same period, Bank of America wrote off $2 billion because of bad credit card loans. American Express Co. and Discover Financial Services, which are responsible for bad loans, saw their earnings decline.)
In addition, the sheer size of Visa's offering might be an advantage to investors. The company wants to sell 406 million shares; Google offered about 19 million when it went public in 2004. To sell that many shares, Visa will be compelled to price them fairly, Fitzgibbon theorizes. "It's like a one-day sale," he said.
But ... buyer, beware
• MasterCard's stock-market success doesn't guarantee the same for Visa. MasterCard went public in a year when the Dow was hitting record highs. Also, when MasterCard went public, investors had no reference for pricing it, since Visa is the only other major company that operates under the same business model. Many analysts now believe that MasterCard's initial offering was underpriced, which is partly why the stock has risen so much.
The banks won't let that happen with Visa, says Eric Grover of Intrepid Ventures in California. He believes that, for Visa stock to quintuple like MasterCard's has, its initial offering would have to be underpriced by 80 percent -- an unlikely scenario. "There will be no windfall here like there was with MasterCard," Grover said. "The banks left a lot of money on the table with the MasterCard IPO."
• MasterCard's success is the exception, not the rule. Of the IPOs created last year, about half were trading below their offer price by the end of the year, said Richard Peterson, director of capital markets for Thomson Proprietary Research. "Technology did well," Peterson said. "Health care did not do well, financial services and real estate did not do well."
Renaissance Capital's IPO Index is down 16 percent this year, while the S&P 500 is down 7 percent.
"Most IPO stocks underperform the market," said Eric Tyson, author of "Investing for Dummies." "People should realize that in their quest to buy the next Microsoft or Google."
• Visa's current success doesn't guarantee that it will always rake in money. "You can't just look at a company's history," said Tyson. "I would want to know how Visa is going to grow their business in the next three to five years."
Despite its strong fourth quarter, Visa lost $861 million over 2007, when it set aside $2.7 billion to settle an antitrust lawsuit with American Express and in anticipation of costs associated with another lawsuit with Discover. Also, Visa said it expects the softening economy and housing market to "moderate our rate of growth" in 2008.
And while Visa is correct that its business model largely shields it from the credit crunch, it's not entirely protected. Visa makes money on a per-transaction basis, so it's relying on consumers to continue spending, and often. Consumers are less inclined to do so when food and fuel are eating up larger portions of their paychecks, and when lenders are getting stricter about handing out money.
• Also, investing in a single company is always riskier than investing in a portfolio. If you're going to invest in an individual company, you should plan to hold that stock for five to seven years, Tyson said. Don't count on flipping your IPO investment for a quick dollar. "That's not investing," Tyson said. "That's gambling."
Investing in an IPO is also inherently risky, which is why Bill Baynard, managing director of Charlotte's Novare Capital Management, usually avoids them. IPOs represent either companies that are new -- which means they haven't proven themselves to investors -- or companies that are private -- which means they haven't had to release too much information about how they do business.
The Blackstone Group, the asset manager and operator of private equity funds that went public last summer, is proof that even established companies can fare poorly in an IPO. It's trading at about $17, less than half its initial price. "They've got a great history and a great track record, but the pricing of that IPO was wrong," said Baynard. "And the people who got in early have paid the price."
Want to buy?
If you're interested in the Visa IPO, talk to your broker before March 19, which is the stock's expected pricing date. Your brokerage firm may have access to the Visa IPO. Be warned, however, that IPOs are usually the domain of institutional investors, and your brokerage firm may reserve IPOs for customers with a certain amount of assets."Generally speaking," said Eric Tyson, author of "Investing for Dummies," "if it's an in-demand IPO, the shares are going to go to people who are connected to the underwriters and not John Q. Public."
You can also purchase Visa shares after the stock starts trading.
Selected IPO winners

Google Inc. 2004 $100 $470

MasterCard Inc. 2006 $40 $190

SOURCE: Yahoo Finance
Christina Rexrode: 704-358-5170