Look closer at Visa's initial public offering

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SAN FRANCISCO -- Visa Inc.'s upcoming initial public offering is shaping up to be this year's hottest ticket on Wall Street. But should individual investors try to crash the party?

It all depends, market pros say.

First, a little background. San Francisco's Visa, the world's biggest processor of credit and debit cards, is the dominant power in one of the world's fastest-growing businesses -- using electronics to make payments instead of cash or checks.

Its IPO, expected to take place at the end of March, will be the biggest in U.S. history by a long shot, raising more than $18 billion. And with as many as 446 million shares to sell, anyone willing to pay the price likely will be welcome at the table, whether they're a hedge fund manager in Greenwich, Conn., or a shoe store owner in Fresno, Calif.

There's little question that Visa has a strong business, analysts say.

Visa is the top electronic payment processor worldwide. It handled more than $3.2 trillion in electronic payments and related transactions in 2006, holding a wide lead over MasterCard, which followed at more than $1.9 trillion. American Express was third, with transactions of $562 billion.

The electronic payment industry is mushrooming as plastic replaces cash and checks for routine transactions. It's now possible to use credit and debit cards to pay for everything from parking meters to vending machines to income taxes. Visa's revenue jumped 33 percent in fiscal year 2007 to $5.2 billion.

"It's a great company," said Kathleen Smith, a principal of Renaissance Capital, a Connecticut firm that tracks the IPO market. "We think it's a very interesting IPO for investors."

Just how interesting, though, will depend on the price at which the Visa stock is offered.

When payment rival MasterCard went public two years ago, it sold shares at a price about 15 times its earnings. Since then, the stock has roughly quintupled. Factor in MasterCard's profit gains in the intervening years, and shares now trade at approximately 22 times earnings.

The MasterCard example is coloring everything about the Visa IPO.

Visa's underwriters figure that MasterCard set its IPO price too low. They're pegging Visa's offering not to what MasterCard sold for two years ago, but rather to where MasterCard stock stands today. Visa's indicated IPO price between $37 and $42 per share would put it at about the same value as the roughly 22 times earnings that MasterCard stock sells for now.

What that means is that the Visa IPO won't be as cheap as MasterCard. Visa buyers are not likely to see the kind of outsized gains in the first few years after the company goes public that investors in the MasterCard offering did. And if Visa's IPO price were to climb above the indicated range, the deal would become increasingly expensive and correspondingly more risky.

For the most part, that's not deterring investment pros. Most of them say an offering price of more than 20 times earnings is reasonable given Visa's powerful position in electronic payments and its prospects for profit growth.

"There's pretty widespread optimism that the offering will be well received and trade higher afterward," said Todd Clark, head of equity trading at Nollenberger Capital Partners in San Francisco. "That's the buzz going around."

But Clark cautions that heavy demand could make Visa IPO shares less attractive.

"It depends on the offering price," he said. "If they were forced to sell this thing much above (the indicated price range), some of the luster would go away."

Still, circumstances are likely to keep the offering price from getting out of control, analysts say. For one thing, some professional investors worry that Visa's stock price could be depressed down the road as the banks that will retain almost half the company's shares sell their positions.

Then too, with the economy in a slump, stock prices have been falling, especially shares of companies that recently went public. Renaissance Capital's IPO index is off 15 percent in 2008, compared with a drop of about 6 percent in the Standard & Poor's 500 index.

"When a company is willing to do an IPO in a weak market, they need to price the IPO to make investors interested," Renaissance's Smith said.

E-mail Sam Zuckerman at szuckerman(at)sfchronicle.com.

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)