RESEARCHV
Visa: best in class, priced like it
Quality is not in dispute. The price assumes the current return on equity is the through-cycle number, and it is not.
The mechanism is the through-cycle return on equity. A multiple of book implies a sustainable return, and paying a peak multiple on a peak return double-counts the same optimism.
The return on equity is at a cycle high by the bank's own long-run disclosure, and the multiple is at the high end of its own ten-year range at the same time.
The position: no call. This is a name I want to own and not at this level, so there is nothing locked here and nothing for the record to grade. If the entry improves I will say so in a piece that does carry a call.
Regulatory change is the risk that is not hedged. A revised capital requirement would trap the distribution this position depends on.
Discussion · 4
Pauline VidalJUL 14
I think the setup matters more than the thesis here. I had not appreciated how much of this is already in consensus. Has anything in the last print changed the entry you would take?
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Pauline VidalJUL 12
Been on the sidelines on this one. The distinction between adequate reserves and the earnings path is well made. How much does this depend on the macro cooperating?
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Ines FerreiraJUL 12
Good piece. The mix argument is the part I had not considered properly. Is there a cleaner way to express this than the equity?
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Olivia GrantAuthorJUL 12
You are right that I skipped over that. The sell side has the direction and not the magnitude, and the magnitude is the entire trade here.
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