(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of V.)
Visa Inc.'s (V) stock has been hot over the past year rising by over 43%, easily outpacing the S&P 500 gain of 13.5%. Options traders are betting shares of the payment processor will continue to increase, perhaps by as much as another 7%, by the middle of August. The company is expected to report fiscal third-quarter results today after the close of trading.
Analysts are looking for the company to report earnings growth of over 26% for the quarter, on revenue growth of over 11%. Robust growth for the company, while trading at 27 times 2019 earnings estimates.
The long straddle options strategy for expiration on Aug. 17 is implying the stock will rise or fall by about 5% from the $140 strike price, placing the stock in a trading range of approximately $133.50 to $146.70. The wagers that shares of Visa will rise by expiration massively outnumber the bets the stock will fall by nearly 18 to 1, with approximately 14,000 open call contracts. It is no small bet either with a dollar value of almost $5.2 million.
Some traders are betting the stock rises by about 7% over the next 28 days, to nearly $150.50 from its current price of $140.80. The open interest at the $150 strike price has risen to about 13,000 open call contracts. The call options cost about $0.50 per contract, and the stock would need to rise to $150.50, for a buyer of the calls to break even if the options are held until expiration.
Strong Earnings Growth
The full-year 2018 outlook for Visa earnings is forecast to be even stronger than the fiscal third quarter. For the full year, analysts are looking for earnings to grow by roughly 29% to $4.51 per share, while revenue is seen climbing by nearly 12% to $20.5 billion. Earnings growth is expected to slow in 2019 and 2020 to 16% each year, while revenue is expected to remain stable at roughly 11%.
The stock currently trades at 27 times 2019 earnings estimates, which also happens to be on the upper end of its historical range. But earnings estimates have been rising throughout the year, and if the company can deliver strong results and better-than-expected guidance, those forecasts could continue to increase, and that would help to reduce Visa's current earnings multiple.
It seems clear that traders are betting on another set of strong quarterly results and see the potential for upward guidance revisions.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.