Tuesday, March 13, 2012

Lets look at Visa (V) today.
This posting is open for discussion and to determine the entry and exit price points by using 3 different methods. These three methods use the historical P/E, CF/S and the dividend (D/S) ratios. Please note that there is a ton of ratios out there.

Definitions of the following terms used:
P/E. Price divided by its earnings, which shows what multiple that a investor is willing to pay for $1 dollar of earnings.
http://www.investopedia.com/terms/p/price-earningsratio.asp#axzz1ywxwNlkP
CF/S is the same as earnings except that its referring to the company’s ability to generate cash.
http://www.investopedia.com/terms/c/cashflowpershare.asp#axzz1ywxwNlkP
D/S or Dividend per share. For this ratio you would use the dividend yield formula.
http://www.investopedia.com/university/ratios/investment-valuation/ratio7.asp#axzz1ywxwNlkP

Using these historical ratios a person can estimate what the stock price range should be.
By comparing the 3 year average vs a longer term (10 year average or more) can also help to determine where the market believes the company is in its life cycle, which includes: start up (venture), growth or mature company.

V trades on the NYSE and has been a publicly traded company for about 5 years. Visa is a credit card processing company.
Since Visa is a newly public company so for the numbers will reflect this point. So here we go: for the past 3 years V has had an average P/E trading range of 24.41 (high) and 14.25 (low).
V also has had some wild swings in its past with P/E values having a high of 93.58.
V has over time has had an average annual Earnings growth of 29.02% . Knowing or at least estimating future earnings you can estimate the share price. In this case V should earn about $6.20 in 2012 and multiply the average P/E, gives the estimated trading range for Vise 151.12 (high) and 88.23 (low).
If your wondering about dividend growth? Yes V has had growth in that area as well.
For the past few years V has increased its dividends by more then 8 fold in the past 5 years.
There is no indication that V won’t continue to paying out more dividends going forward. In fact it is expected that V will increase its dividend by 15% in 2013 to 1.02 per share from its current amount of .88 per share.
Looking at the price per dividend rate (P/D) V has a range of .52(high) and .89 (low) with a current .80% implies that V is fairly prices at this point based on last years P/D. However if you are wondering what the price range is, look at the dividend ratio for 2013 should support a price range of 168.94 (high) and 99.08 (low)
Now on to how to trade, as I’m looking to purchase shares of V so I’ll be writing a put at my price estimates in this case I’m looking to write a Put Option at $80 on the www.cboe.com . So I’m looking to sell 10 September 2012 Put contracts for the 80 strike price and collect the premium of 1.10 per share.
If your wondering on what the return would be? 80000/1100 = 1.375%