The Henry Fund Henry B. Tippie School of Management Husam Atari [husam-atari@uiowa.edu]

Visa Inc. (V) March 8, 2016

Financial Services – Payment Services Stock Rating Buy

Investment Thesis Target Price $91.00 We recommend a BUY for Visa Inc. (V), with approximately 29% upside. Visa is well positioned to benefit from the progressively cashless consumer and the technological advancements associated with this shift. The Visa Europe acquisition will contribute positive growth through a larger international presence, higher payments volume and an increase in processed transactions. Visa’s strong economic moats, via its network value proposition, scalability and strong brand equity, will widen – sustaining its competitive advantage and high profit margins for many years to come. Drivers of Thesis • Over the next 8 years, the increase in non-cash transactions will outpace

previous years, growing at a 10.47% CAGR; Visa will capture enough of this growth to boost its payments volume by 7.5% YOY, ultimately leading to an overall revenue CAGR of 8.64%.

• Visa’s partnerships with tech companies, along with its own technologicaldevelopments, will enable it to insert itself in more transactions to the tune of an 8.98% CAGR in processed transactions from now until 2023.

• The Visa Europe acquisition will add at least 18B processed transactionsand bring 1 out of every 5.70 Euros spent in Europe onto Visa’s network. Such additions will increase Visa’s market share to above 60%, thereby improving its revenue growth prospects.

• Visa’s brand, scalability, unique network and value proposition make it themost ubiquitous payments resource for consumers, merchants, and issuer banks alike. Such economic moats will help Visa increase revenue growth, while maintaining a stable and lean cost structure, culminating in continued high operating margins (approximately 66%).

Risks to Thesis • Non-cash growth rate could stagnate or decelerate, causing Visa’s

payments volume and resulting revenues to not meet expectations. • The Visa Europe acquisition could fall through or not have the expected

positive impact on Visa’s growth prospects. • Consumers could use non-network payments companies, such as PayPal,

more than expected, thus bypassing Visa’s network.

Henry Fund DCF $90.54 Henry Fund DDM $80.58 Relative Multiple $66.04 Price Data Current Price $70.62 52wk Range $60–81 Median 1yr Target $87.00 Key Statistics Market Cap (B) $169.20 Shares Outstanding (M) 19,460 Institutional Ownership 92.80% Five Year Beta 1.015 Dividend Yield 0.77% Analyst est. 5yr Growth 16.50% Price/Earnings (TTM) 25.39 Price/Earnings (FY1) 21.74 Price/Sales (TTM) 12.06 Price/Book (mrq) 5.76 Profitability Operating Margin 65.68% Profit Margin 47.64% Return on Assets (TTM) 12.30% Return on Equity (TTM) 23.34%

Earnings Estimates Year 2013 2014 2015 2016E 2017E 2018E EPS $1.90 $2.16 $2.58 $2.75 $3.19 $3.56

growth 139.90% 13.68% 19.45% 6.61% 15.97% 11.63% 12 Month Performance Company Description

Visa operates a global credit card network that enables the transfer of electronic payments among consumers, businesses, and financial institutions. Visa also processes certain payments that occur on its network, meaning it facilitates authorization, clearing and settlement of such payments. Visa does not issue credit cards or extend credit, rather it provides its financial institution clients Visa branded products to offer consumers and businesses.

Tear Sheet Data Sources: Yahoo! Finance; FactSet

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Important disclosures appear on the last page of this report.

EXECUTIVE SUMMARY

Visa is the market-leader in the very profitable credit card networks industry. However, industry may be generous as, Visa and MasterCard are the only two open-loop networks in the world, and thus make-up a stable and lucrative duopoly. Visa is well-positioned to further increase its market leadership, as we expect it to increase its market share of non-cash transactions, from 58% to 64% by 2017.

The main reasons Visa will be able to increase its market share are: the rise in non-cash transactions globally, the Visa Europe acquisition, internal technological innovation, external partnerships and investments in technology, and strengthening the economic moats that surround its profitability.

Visa’s innovation, unique network, and scalability enable it to peerlessly serve the three most important parties in the payments domain: consumers, issuers, and merchants. Moreover, Visa’s extremely high brand equity fosters a strong relationship of trust and loyalty among these three segments. Thus, Visa has developed, and will continue to sustain, a competitive advantage that leads to profit margins in the 65% range.

As such, Visa represents an investment opportunity in a profitable, nimble, and creative market leader. Specifically, we believe Visa’s stock currently has an intrinsic value of $91. This represents approximately 29% upside relative to its current market price of $70.62, hence our BUY recommendation.

COMPANY DESCRIPTION

Visa is a global payments technology company that aims to “accelerate the electronification of commerce.”i Visa works to achieve this aim through operation of its open loop network, VisaNet, which provides the payment rails for consumers, businesses, and financial institutions to transfer electronic payments.

To clarify, an open loop network differs from a closed loop network, as closed loop networks (i.e., American Express and Discover) can extend credit and/or issue payment products directly, thereby excluding 3rd party issuers and/or acquirers. Issuers are financial institutions that provide payment cards directly to consumers and acquirers are financial institutions that process card payments on behalf of a merchant.

Hence, Visa, as an open loop network, does not issue payment products, extend credit, or set rates, and thus, does not bear credit risk. Rather, Visa signs long-term contracts with issuers that allow the institutions to offer Visa branded payment products to merchants and consumers. This greatly simplifies Visa’s business model, allowing it to focus on its 3 primary sources of revenue.

Exhibit A: Visa Network Illustration

Source: Company reports

How Visa Makes Money

Due to its relatively simple business model, Visa only has one reportable segment: Payment Services. Within this segment, Visa has the following revenue streams: service, data processing, and international transactions.

Source: Company reports

Service revenues stem from Visa’s contracts with its issuer clients and the volume of payments using Visa-branded products.ii However, payments volume, or the total amount of money that flows through Visa’s network, is the primary driver. Hence, service revenues can be thought of the money Visa makes every time someone “swipes” a Visa card – either physically or electronically through a mobile app or a computer.

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The frequency of such swipes is important too because Visa makes money every time one of its products is used. Visa’s service revenue yield is the percentage of payments volume that translates into revenue. The greater frequency of swipes, the higher percentage of yield.

The recently announced acquisition of Visa Europe, consumers’ continued transition away from cash and Visa’s ability to harness technological developments all bode well for Visa’s payments volume growth going forward. Specifically, we model Visa’s payments volume averaging just above 7.5% growth YOY from 2016-2023, in line with its historical rate of approx. 8%.

Source: Company reports; model projections

Additionally, the declining trend in non-cash transaction (i.e., transactions excluding cash withdrawals from an ATM with a Visa) size is another good sign for Visa’s service revenue growth. Per the most recent data, transaction size decreased by nearly 1.75% from 2012-2014. This shows that people are using credit/debit cards increasingly for smaller transactions such as parking or taxi rides, which makes sense given today’s increasingly cashless world.

Source: Company reports (CY=calendar year, this data lags behind a year for annual reporting)

This trend is a good sign: as the payments volume increases, but the size of non-cash transactions decreases, swipes occur at a greater frequency.

This in turn should raise Visa’s service revenue yield. Accordingly, we foresee Visa’s 2016-2023 service revenue yield CAGR outperforming its historical pace by about 15 basis points.

Source: Company reports; model projections

Data processing revenues are based on authorization, clearing, settlement, and other services related to transaction and information processing. Put differently, this is the money Visa makes when it is directly involved with the transaction’s information flow. The number of Visa processed transactions drives these revenues.iii Looking ahead, Visa’s internal technological innovation, as well as its leverage of external technological advancement, have put Visa in strong position to process more transactions.

More immediately, Visa Europe will add at least 18B in processed transactions to Visa’s network – most likely in 2017 as the deal is expected to close in the latter half of 2016.iv Hence our forecast of approximately 90B processed transactions in 2017, versus 71B in 2015. This acquisitive accretion and our expected organic growth spur our 2016-2023 processed transactions forecast.

Source: Company reports; model projections

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International transaction fees constitute the revenues Visa earns for cross-border transaction and currency conversion activities.v Given that Visa hedges its currency exposure, the primary driver here is the cross-border transactions. A transaction is deemed “cross-border” when the issuer’s country of origin differs from the merchant accepting the payment and/or from the ATM used for cash withdrawal.

The Visa Europe deal will certainly increase its international presence, and thus Visa’s international payments volume will make up a larger percentage of its total payments volume.vi Specifically, the US made up approx. 53% of Visa’s payments volume in 2015, but by 2017 that number will drop to 45%.

Source: Company reports; model projections

However, it should be noted that the Visa Europe acquisition will bring more contracts with foreign issuers, which decreases the odds of the differing issuer/merchant transactions that trigger cross-border fees. Hence our model forecast, wherein Visa’s international transaction revenue will certainly grow, just not as aggressively as its other 2 revenue streams.

Source: Model projections

Visa also has a contra revenue account, labeled “client incentives.”vii This amount is deducted from gross revenues to arrive at operating revenues. Here, Visa spends money on the front-end, with the aim of increasing payments volumes and processing rights from issuers and merchants, and thus making more money on the back-end. We expect this contra-account to remain stable at 17% of gross revenues.

Beyond The Plastic

Consumers want payment method optionality, issuers need to offer cards and digital products to meet such demand, and merchants need to accept a wide variety of payments to avoid foregoing potential sales. Accordingly, Visa’s business model is quite simple: it has products and services that satiate the consumer, issuer, and merchant appetite.

More importantly, Visa offers the world’s largest electronic payments network, at 150M transactions per day, and a brand that consumers, issuers, and merchants trust alike.viii Indeed, Visa ranked 30th in Forbes’ “World’s Most Valuable Brands” in 2015 and was one of Fortune Magazine’s “Top 50 Most Admired Companies” in 2016.ix

Regarding product line, Visa offers the traditional debit cards, prepaid cards, and credit cards. However, Visa’s debit and credit cards are also available electronically through mobile platforms, tablets, computers, etc. In fact, Visa is aggressively expanding its digital products and service offerings.

For example, Visa payWave is a new technology that enables consumers to pay for a product by simply waving their card or phone in front of a reader. This benefits Visa’s 3 main revenue generators: merchants, consumers, and issuers. It is more convenient and secure for consumers because it does not require entering a pin number or signing a receipt. For merchants, it boosts the chances of larger purchases than cash payments and cuts down on checkout lines. Regarding the larger cash payments, a Visa Payment Panel Study in 2012 (most recent data), showed that the average US cash transaction is $17 vs. $66 for credit card.x

Also, payWave enables issuers to expand their digital payment offerings and meet customer demand for modern payment methods. Moreover, the number of contactless payments, which use technology such as

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payWave, is set to double in 2016.xi In short, payWave is just one example of Visa’s internal innovation that adds value for its main customer segments, and in turn should increase revenues going forward.

Visa has also shown a nimbleness to harness external technological developments. For example, in 2011 Visa invested in Square, a merchant services and mobile payments company. Visa owns about 10% of Square’s publicly traded shares, and 1% of the entire share base.xii Square mostly focuses on merchants, and empowers those that could not otherwise accept electronic payments. For example, it used to be difficult and costly for taxi drivers to accept cards, but now they can just plug a Square reader into their phone and accept payments.

Since Square technology makes it easier for merchants to accept mobile and card payments, it should increase the number of purchases via such methods. It follows then, that card and card linked mobile payments volume will increase, and Visa’s service revenues along with it. Therefore, this investment enables Visa to partner with a merchant friendly technology that should boost Visa’s revenue growth.

Similarly, Visa has also invested in Stripe, a young tech company that facilitates online and mobile payments.xiii Stripe’s strength is its payment processing technology, which should help Visa increase its data processing revenues. More specifically, absent a contractual obligation, acquirers and issuers do not have to let Visa process payments – even for transactions involving a Visa card. Clearly, this can be harmful for Visa’s processing revenue growth prospects. However, if Stripe can insert itself in in processing routes that Visa would not otherwise be able to, Visa will still benefit as a shareholder of Stripe.

Such investments show that Visa understands the rapidly changing payments landscape, and is smart enough to get ahead of the curve, and bet early on potentially lucrative partnerships.

In sum, Visa takes its value proposition far beyond the physical credit or debit card. Whether it’s decreasing time wasted in checkout lines through payWave or investing in companies that offer more nuanced payment solutions, Visa is committed to its merchants, consumers, and issuers alike.

RECENT DEVELOPMENTS

Costco and USAA Contracts

In March 2015, Costco announced it had entered into an agreement to use Visa’s credit card network for its US and Puerto Rico stores.xiv Previously, Costco had used the American Express network for 15 years. This is a big coup for Visa, as Costco is one of the largest wholesale retailers in the world, and its US customer base is its strongest. In particular, for Costco’s 2Q FY2016, it reported a 3.6% increase YOY in its member base and a 3% increase YOY in US sales.xv In other words, Costco is adding new members and selling more to existing members – at least domestically, which is the only relevant market for Visa given the nature of the agreement.

Moreover, Costco will not only offer Costco Visa Cards, issued through Citi Bank, but will also accept any other Visa card its customers have.xvi Thus, Visa will derive a dual benefit from the Costco deal: new users and swipes from the Costco specific card and additional swipes from already existing Visa cards that previously could not be used at Costco.

In October 2015, USAA Bank announced that it would switch networks, from MasterCard to Visa, in 2016.

xviii

xvii This is significant because USAA was MasterCard’s biggest debit card issuer, to the tune of approximately $26B in payments volume in 2014. Combined, USAA and Costco accounted for $70B in payments volume in 2014.xix Given that Visa’s 2014 (calendar year) payments volume was approximately $4.8T, this would be a 1.5% increase for Visa’s main service revenue driver. Put differently, using 2014 numbers as a proxy, it would be reasonable to assume that these new clients will contribute around 1-2% of the expected 7.5% YOY growth in payments volume discussed above.

Visa Europe

Some implications of the Visa Europe acquisition have been highlighted above, however the agreement is significant enough to warrant further examination. The deal was announced in November 2015, and is expected to close in the latter half of 2016.xx Still, it should be noted that until this transaction officially closes, Visa Europe will remain a wholly separate entity that operates its own network.xxi

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Visa is financing the $23.4B deal through a combination of cash, debt, and preferred stock.

xxiii

xxii More specifically, Visa undertook its first ever bond issuance, of $16B, to help finance the transaction. Additionally, Visa will issue up to $5.5B in preferred stock in relation to the deal, but less than half of that preferred stock will be convertible into the publicly traded Class A common stock.xxiv However, the terms and timing of the conversion are unclear, and whenever such conversion takes place it is expected that any potential dilution will be offset by repurchases.xxv Given this uncertainty and the likely dilution offset, the potential preferred stock was not included in our model.

The processing and geographical aspects were delineated above. Direct transfer of payments volume and market share is more difficult to project, but there are a few data points that can be used as proxies of measurement. In particular, 1 out of every 5.70 Euros spent in 2015 used Visa Europe’s network.xxvi

Source: Visa Europe Annual Report

Also, approximately $1.65T worth of purchases and cash withdrawals occurred on Visa Europe’s network in 2015.xxvii Assuming cash withdrawals do not make up the vast majority of that amount, Visa should benefit from this acquisition immensely. Specifically, Visa’s payments volume, the key driver for its largest source of revenue, should see a 21% jump in 2017 relative to 2015

Source: Company reports; model projections

However, it should be noted that this bump is not entirely due to the Visa Europe deal. Certainly, that will be a significant contributor, but other factors such as growth in mobile payments and new clients, including Costco and USAA, will play a role too.

The acquisition will increase costs too – whether in the form of added interest expense from the debt financing or higher SG&A. But, operating a credit card network is a very non-capital intensive business, and Visa has historically demonstrated strict cost discipline. Moreover, the expected additional revenues from Visa Europe more than offset the corresponding costs.

Also, while Visa Europe’s numbers are quite impressive, cash and check still represent 37% of personal consumption expenditure in Europe.xxviii This translates into approximately $3T for Visa to go after in the European market.xxix Thus, the non-cash payments market is far from saturated and, based on Visa Europe’s historical success, quite attractive.

In terms of the balance sheet, the acquisition will not have drastic consequences. More specifically, Visa Europe, at approximately $4.5B assets (as of FY2015), only represents about 11% of Visa’s $40B (as of FY2015) balance sheet.xxx Nonetheless, the accounts that will see significant jumps are accounts receivable ($847M to $2.6B) and accounts payable ($127M to $2.3B). Also, given the approx. $20B difference in purchase price and book value, Visa’s goodwill is set to more than double. Visa’s decision to issue bonds will also add approx. $16B to long-term debt, whereas before it had no such liability.

Source: Company reports; model projections

In short, Visa’s asset size will grow from $40B to approx. $61B, but most of that stems from goodwill; and beyond 2016 its balance sheet will grow in line with its historical pace (3.5% 2011-2015 vs. 4.3% 2016-2023).

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Source: Company reports; model projections

Technological Innovation

While obtaining new clients or undertaking strategic acquisitions will be key contributors to Visa’s future success, the star of Visa’s growth story will be technology. Whether that’s harnessing external innovations, such as the Stripe and Square relationships delineated above, or internally expanding the frontier of payment services.

Some key data points illustrate the significance of technology going forward: global eCommerce is growing at 23% annually, global mobile commerce is growing at 32% annually, and global mobile payment volume is expected to grow at 25% annually (topping $1T by 2019).

xxxii

xxxi Additionally, 46% of global shoppers purchased products via mobile at least 3x in 2015, relative to only 40% in 2014.

These trends indicate that the future of payments, and the growth potential for Visa along with it, is digital. Accordingly, Visa has stayed on top of its game. More specifically, Visa launched Visa Checkout in 2014, which is an online feature that functions as a PayPal like payment gateway. It greatly simplifies online shopping, especially on mobile phones. Rather than entering card information manually, a user simply clicks on the “Visa Checkout option” to pay, then confirms the order.

Exhibit B: Visa Checkout Process

Source: Visa

All that is needed to create a Visa Checkout account is: name, email or mobile number, and a debit/credit card.xxxiii

xxxiv

In fact, a user can link any of the 4 major network cards: Visa, MasterCard, American Express, and Discover.

Actually, it appears Visa has found a way to make money from its competitors. For example, sans Visa Checkout, a MasterCard user making a purchase online will not involve Visa in any way – no network service, no processing. But now, if a MasterCard user pays for an online purchase with Visa Checkout, Visa will process the information on some level. In such a scenario, MasterCard would make some service revenue, as its network is the one being used, but Visa would also make some processing revenue thanks to Visa Checkout.

The fact that Visa Checkout customers completed online transactions 22% faster than customers using a typical checkout process, demonstrates its ease and convenience.

xxxvi

xxxvii

xxxv However, Visa Checkout’s benefits extend to merchants too as Visa Checkout customers complete 30% more transactions than the typical online shopper. Additionally, Visa Checkout users complete 86% of initiated transactions, compared to 73% for PayPal, and 57% for traditional merchant checkout.

Source: Visa

Clearly, Visa Checkout builds on Visa’s multi-faceted value proposition: it makes shopping easier for consumers and it enables merchants to close more sales. Accordingly, as payments become increasingly digital based, Visa Checkout will be a prominent player and help Visa realize its growth potential.

Visa’s recently opened “Innovation Center” in San Francisco collaborates with start-ups, merchants, financial institutions, and the Bay Area tech community, further demonstrating Visa’s unique ability to cooperate with various members of the payments sphere.xxxviii

For example, Visa has been working with Honda, ParkWhiz, Pizza Hut, and Accenture on various ways to utilize cars as payment devices. Given that 250M internet equipped cars are expected to be on the road by 2020, there is immense opportunity for payments to be a part of

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the automobile space.xxxix So far, Visa has displayed proof-of-concept apps that let people buy gas, pay for parking, and/or order food with the push of a single button dashboard button.xl

It’s also worth noting that Visa has partnered with Apple Pay, Samsung Pay, and Android Pay – the 3 key mobile wallets. Given that 148M global consumers will use their phones for in-store purchases in 2016, such partnerships will only add to Visa’s payments volume growth.xli To clarify, these mobile wallets link to a user’s credit and/or debit card and as such, must use the card’s network to make a payment. Hence, a mobile wallet payment, linked to a Visa card, makes money for Visa much in the same way a typical plastic swipe would.

In sum, Visa’s partnerships, investments, and innovation, all pertaining to the digital revolution of payments, greatly buoys our case for its future growth. More specifically, the increasing use of digital platforms, and Visa’s strategic involvement, will help trigger the growth in payments volume and processed transactions (as outlined above in the Company Description).

Earnings

For Q1 2016, Visa reported an EPS of $0.69.xlii This beat analyst estimates by one cent. Visa has actually beaten analyst estimates 18 of the past 20 quarters, further demonstrating its ability to outperform market expectations. For the discussion on our forecasted EPS relative to analysts, please see the “Relative to analyst estimates” paragraph in our Valuation section below.

INDUSTRY TRENDS

Security

Any time money is transacted, the security of the payment is at the forefront of the involved parties’ mind. Whether that’s the merchant ensuring the cash received is authentic or the consumer hoping the personal information embedded in their card or mobile wallet is not compromised. Accordingly, fraud prevention is a key tenet for credit card networks – and as the world’s largest network, Visa is no exception.

No network discloses exactly how much it loses due to fraud, nor how much it spends to prevent fraud. However, it is estimated that fraud cost the US $8.6B in 2014 – but

even this number does not elaborate on the allocation of such losses among parties.xliii Nevertheless, fraud is costly, and not just in monetary terms – reputationally, if a consumer or merchant does not trust the payment product, that product will have a short shelf-life. It comes as no surprise then that Visa and the other members of the payments ecosystem have worked to reduce this risk, with 2 technological advancements in particular: EMV and tokenization.

EMV, which stands for Europay, MasterCard and Visa, is a global standard that adds an element to networks’ branded physical cards.xliv More specifically, EMV equipped cards have a computer chip that acts as an alternative to the traditional magnetic stripe. Accordingly, EMV cards are either read or inserted, or “dipped”, into a terminal slot instead of swiped.xlv The biggest benefit of this new technology is that the card chip, unlike the magnetic-stripe, creates a one-time transaction code that cannot be used again, eliminating the risk of duplication – a common form of hacking.xlvi

Regarding Visa specifically, EMV cards really took-off in 2015 with 212M cards issued, a 644% increase relative to 2014.xlvii

xlviii

In fact, EMV cards made up approx. 70% of Visa’s total credit based payments volume in December 2015 alone.

Source: Visa

Tokenization occurs when standard card details are swapped for a substitute number – the “token.”xlix While EMV is a physical card development, tokenization aims to deter fraud in the increasing digital payments space.

Given the increasing use of digital products, tokenization will be important for the networks’ reputational capital going forward. Such security measures should only add to Visa’s own reputation – and thus the brand equity that contributes to the economic moats surrounding its profitability.

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China

In 2015, Chinese authorities, for the first time, announced plans to potentially license foreign networks for domestic operation.l Currently, UnionPay dominates the Chinese networks and foreign networks are only able to make money via co-branded cards making purchases outside of China.li Information on UnionPay is sparse, but it to be a closed-loop network, in that it both issues cards and operates payment rails (in China only).

If Chinese authorities open up this market, it would present a great opportunity for the foreign networks, including Visa, as China’s total card transaction volume stands at $7T.lii Or $2.2T more than Visa’s global payments volume in 2015. As such, if Visa is able to capture even 2% of China’s market, it could instantly add $140B in payments volume. To put this number in perspective, adding it to our 2016 projections would increase revenues by about $185M, or 1.2%.

Unfortunately, details surrounding the licensing requirements and economics of the domestic card market have been sparse, reducing the likelihood that expansion into China occurs in the near future.liii Therefore, it would have been highly speculative to incorporate the Chinese growth opportunity into our model forecasts. Nonetheless, this announcement was still a key development of the past year and could pave the way for significant opportunities for the card networks, including Visa, down the road.

Blockchain

Blockchain is a technology that underlies Bitcoin, an alternative form of digital payment. Blockchain creates a network for Bitcoin based transfers and keeps a ledger of all the transactions that occur on the network.liv Blockchain is not owned by anyone – it is a completely decentralized peer-to-peer database.

Consequently, and quite relevantly for card networks, Blockchain has the potential to create a new set of payment rails that completely exclude the card networks. Despite this potential, Blockchain has not had a material impact on the card network system yet, however its capabilities are certainly something that should be kept in mind.lv

Perhaps most fascinating, from a card network perspective, is the networks’ ability or inclination to respond to Blockchain if it becomes more mainstream. Networks may attempt or develop the capacity to incorporate Blockchain into their existing rails, as they did with mobile wallets. For example, in 2015, Visa, Nasdaq, and Citi invested $30M in Chain.com – a Blockchain developer platform.lvi

Details surrounding the investment, and Visa’s goals pertaining to it, are scant but at an estimated valuation of $150M, $30M represents a significant stake.lvii Clearly, key players in payments, and the broader financial industry, are keeping more than an eye on Blockchain’s potential. However, it’s also possible Blockchain may be so distinct that it presents the most formidable foe to the network in decades.

MARKETS AND COMPETITION

King of the Networks

Defining a market is always difficult, but since card based transactions ultimately drive network revenue, examining market share from that perspective can be informative. More specifically, per the most recent data in 2014, Visa owns at least 58% of the card transaction market.

Source: The Nilson Report

Given the Costco and USAA contracts, the Visa Europe acquisition, and Visa’s technological innovation, we expect this market share to increase over the next 8 years, peaking at 64% in 2017. Additionally, Visa is not just the market leader, but also the most profitable of the card networks, open or closed loop notwithstanding. Suffice it to say, Visa enjoys a strong competitive advantage – one we expect it to maintain, at the least.

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In numeric terms, Visa has increased its operating margin each of the last 5 years and we expect it to increase again this year before stabilizing at around 66% from 2017-2023.

Source: Company reports; model projections

Visa’s competitive advantage is sustainable for numerous reasons. Firstly, its value proposition creates the positive feedback loop that reinforces itself among issuers, consumers, and merchants. Secondly, its ubiquitous brand is of the utmost regarded, as evidenced by its Forbes and Fortune rankings highlighted above. Put best, the value proposition invites consumers, merchants, and issuers to choose credit/debit cards (physical or digital), but the brand persuades them to choose Visa.

On the capital efficiency side, Visa has a unique resource: there are only approximately six card networks on the planet, and only two open-loop ones at that. Thus, the payment rails that enable credit/debit card transactions are in short supply, and Visa operates the largest one.

Moreover, Visa’s products and process are quite scalable: it can add swipes, payment volume, and customers at very little cost. Two key points illustrate this well:

(1) its costs, as a percentage of revenue, have been declining, across the board, as its revenue has been increasing;

Source: Company reports

This shows that on a broad level, Visa is able to add revenue without having to add costs at the same rate.

(2) network and processing, or what it costs to run its network, is a very stable and low 3.4%-4% of revenues, notwithstanding of sharp increases in payments volume.

Source: Company reports

This shows that Visa can support trillions more spent on its network, at negligible, if any cost.

In short, Visa has strong economic moats surrounding its competitive advantage: value proposition feedback loop, brand, largest and rare network, and scalability. As our profitability projections suggest, we do not envision these moats thinning any time soon.

MasterCard

As the only other open-loop network, MasterCard is Visa’s most direct competitor globally. Essentially, the two operate in a stable duopoly as the #1 and #2 networks overall (see pie-chart at beginning of Markets and Competition), and sole open-loops in the world. Accordingly, it’s worth examining how the two stack up against each other.

Source: Factset

Visa MasterCardMarket Cap $170B $98BP/E (forward) 21.74 20.98ROA (5 yr. avg.) 12.03% 23.05%ROE (5 yr. avg.) 16.50% 46.19%OM (5 yr. avg.) 62.08% 53.62%LT Debt/Equity (2016) 0.54 0.55Est. LT Growth 16.50% 13.80%

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Visa nearly doubles MasterCard in market cap, a testament to its large network and market leader position. The market also expects Visa to grow more in coming years, as evidenced by Visa’s higher P/E and estimated LT growth rate. This likely stems from the Visa Europe acquisition and Visa’s more aggressive development in the tech space. As measured by operating margin, Visa is a bit more profitable, but MasterCard consistently has higher ROA and ROE. This is because MasterCard’s balance sheet is 40% the size of Visa’s ($16B in assets vs. $40B), and this is before the Visa Europe acquisition.

Clearly, Visa is the larger company, yet is still expected to outgrow MasterCard in the future. It would seem then that MasterCard could aggressively go after Visa’s market share, perhaps through price competition for more issuer contracts.lviii However, MasterCard is likely kept from doing so because Visa’s higher operating margin suggests that competing on price would harm Master Card more than Visa.lix In other words, MasterCard is more profitable in the current state of duopoly, than it would be if it engaged in a price-war to boost market share. Thus, Master Card is incentivized to do its part to keep the open-loop duopoly stable.

Closed-Loops

Recall, closed-loop networks, American Express and Discover, have fundamentally different business models. As financial institutions and issuers, they generate revenues via credit extension and are also exposed to the associated credit risks.

Accordingly, the closed-loops are more indirect competitors to Visa. Nonetheless, as two of the six global networks, a comparison of metrics is still relevant.

Source: FactSet

Again, Visa is much larger than both in market cap, nearly doubling the two closed-loops combined. And again, Visa dominates the operating margin metric. Regarding ROE, at first glance, Visa appears to lag behind but a quick look at

ROA dispels that notion. In other words, the closed-loops, are nearly 4x as levered as Visa, and such leverage drives their ROE, but when that heavy dose of debt is adjusted for in ROA, Visa is the clear winner.

Additionally, given the closed-loops financial institution status, the market rightly treats them as banks, which is why they have such low P/Es. Thus, closed-loops are excluded from the relative valuation given their difference in business models and stark distinctions in P/Es.

In terms of competing against Visa in the network arena, it’s not much of a fight. Especially regarding Discover, as its network related revenue is less than 10% of Visa’s.

Source: Factset

And at first glance, American Express seems to be a formidable challenger to Visa’s network, at least by revenue standards. However, the $22B number is a bit misleading because American Express focuses on high spending and high credit quality US consumers.lx In other words, American Express uses its issuer capabilities to skew its revenues toward large credit-based transactions.

On the one hand, this is an example of the closed-loop model providing benefits that Visa cannot obtain. On the other, American Express lags far behind in number of transactions (see pie-chart at beginning of Markets and Competition) and operates a more complicated bank-like model, with bank-like consequences – such as credit-risk and more stringent regulations. It seems Visa is willing to make the trade-off of higher revenues for more transactions, higher profitability, and its simplified business model which reinforces its moated value proposition.

Upon further review, it seems that Discover is much too small a player to be considered a competitor, and American Express, while more challenging, does not appear to be a serious threat. In fact, Visa outnumbers American Express in its crown jewel: US credit cards approximately 280M to 55M.lxi And this is before the approximate 5M reduction American Express will experience as a result of the Costco breakup.lxii

Visa American Express DiscoverMarket Cap $170B $57B $20BP/E (forward) 21.74 10.6 8.2ROA (5 yr. avg.) 12% 3.27% 3.05%ROE (5 yr. avg.) 16.50% 26.54% 24.19%OM (5 yr. avg.) 62.08% 21.96% 40.25%LT Debt/Equity (2016) 0.54 2.00 1.92Est. LT Growth 16.50% 13.20% 6.10%

Visa American Express DiscoverNet Interest Income (2015) - $5B $6.7BNetwork related revenue (2015) $14B $22B $1.3B

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Ultimately, given Visa’s profitability advantage, like MasterCard, it is probably in the closed-loops’ best interest to not disrupt the broader four network oligopoly. This is probably why there is a lack of fierce competition among the four. Even the Costco contract appears to be more of a Costco decision than Visa swiping them from American Express. Lastly, the market supports our contention that Visa is much better positioned for growth, as evidenced by the estimated growth rate for Visa relative to the closed-loops.

There are other two closed-loop networks that exist, JCB and UnionPay. However, JCB is in Japan and UnionPay in China, thus reliable information is not readily available pertaining to either company. Additionally, neither currently competes, as networks, outside their home countries. As such, they are not warranted attention in this research report.

Processors

Although processors are not networks, their main revenue stream is the same as Visa’s second largest source of revenue. Therefore, it’s reasonable to think that Visa competes with processors on some level. As such, it makes sense to compare Visa to the biggest pure processors.

The familiar theme of Visa’s size and profitability appear again. Another thing that jumps out is that Visa’s processing revenue is just below First Data’s, on par with Fiserv’s, and much higher than Global Payments’. This is impressive given that processing is Visa’s secondary component, and the sole focus of these three companies.

Source: Factset

Also, Fiserv and Global Payments trade much more similar to Visa than any other company, besides MasterCard. In other words, Fiserv and Global Payments have P/Es at least in the ballpark of Visa’s, unlike the closed-loops. Thus, Fiserv and Global Payments, given the somewhat similar P/Es, and the fact they are, at the least indirect,

competitors with Visa, were both included in the relative valuation model.

It is worth noting that there are banks, such as Wells Fargo and Citi, that are not networks nor solely processors, yet offer processing services, and thus compete in this space. In fact, with networks, pure processors, and other companies that are neither but offer processing services, this arena is likely the most competitive for Visa. In other words, issuers and merchants have great optionality here, including issuers who can choose themselves to process a transaction. In this light, Visa’s investments in Stripe, Square, and Visa Checkout make even more sense. These are strategic moves to ensure that Visa is not cut out of the processing space.

Given these investments, and the Visa Europe acquisition, we still expect Visa to boost its processed transaction volume and processing revenues (both highlighted above). However, because of the confluence of processing options, we expect Visa to compete on price here, and thus lower its processing fees. This is reflected in our data processing revenue per transaction projections.

Source: Company reports; model projections

PayPal and Disintermediation

PayPal is a mobile app that is most accurately defined as a gateway. PayPal is neither a network nor a processor, but rather a service that allows users to store debit/credit cards and/or checking accounts within the app, then use the app to make online payments. When a consumer links their Visa card to PayPal, payments made from that account still contribute to Visa’s volume.

However, the issue for Visa arises when users link PayPal directly to their savings or checking account, and make payments in that manner, thereby leaving Visa out altogether. This risk of missing out is known as disintermediation. Hence, Visa’s launch of Visa Checkout

Visa First Data Fiserv Global PaymentsMarket Cap $170B $12B $22B $8BP/E (forward) 21.74 8.65 19.4 17.91ROA (5 yr. avg.) 12.03% -2.23% 19.22% 6.80%ROE (5 yr. avg.) 16.50% - 19.48% 21.95%OM (5 yr. avg.) 62.08% 11.16% 23.60% 16.48%LT Debt/Equity (2016) 0.54 28.05 1.14 0.96Est. LT Growth 16.50% 17.20% 11.30% 11.30%Processing Rev. (2015) $5.5B $6.6B $5.25B $2.8B

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and partnerships with mobile wallets (data and benefits relating to both outlined above).

Visa Checkout is still too new to have enough growth data to make volume comparisons with PayPal, but it is worth recalling the sales conversion data, where Visa Checkout users make purchases at a 13% higher clip. In other words, early indications are that Visa Checkout will be able to help Visa mitigate disintermediation risk at least, if not formidably compete with PayPal.

Moreover, Visa’s partnerships with mobile wallets are relevant here too. If more people are using digital payments, a non-PayPal option that does not risk disintermediation is obviously ideal for Visa. One promising sign, not just for thwarting disintermediation risk but general payments volume growth, is that in 2015, Apple Pay was the most preferred digital option for 24% of US consumers, vs. 22% for PayPal.lxiii

It is also worth noting that, as of 2012 (most recent data), 50% of PayPal’s payments still involved a Visa card.lxiv Additionally, as of 2014 (most recent data), credit/debit card still made up about 75% of the digital payment market, relative to approximately 12% for PayPal.

In short, PayPal has the ability to both help and hurt Visa, a “frenemy”, if you will. It is unclear whether the two companies will work closer toward formal partnership or if PayPal will prefer to try to make more money by attempting to disintermediate Visa. Either way, Visa is well positioned – it is more than capable of working with PayPal or competing with it through Visa Checkout and mobile wallets.

Source: Statista, comScore

Given that PayPal has been public for less than a year, an in-depth peer comparison would not be very telling. However, PayPal was included in the relative valuation model due to the fact that it is in the broader payments industry, somewhat competes with Visa, and trades at similar forward P/Es.

Network Alternatives

It’s difficult to imagine a new network entering the market, open or closed-loop. Visa’s economic moats, along with the stable mutually beneficial open-loop duopoly, and the slightly broader four network oligopoly, really make the inherent structure difficult to disrupt – at least on a pure network level.

In fact, if three of the major issuers, JP Morgan, BofA, and Citi, decided to create a network, the combined customer accounts of this new network would be less than 14% of Visa’s, excluding Visa Europe.lxv It follows then that the number of cardholders, of this hypothetical network, would be too small for merchants to be motivated to accept this new card.lxvi In other words, it would be difficult, if not impossible, for this new network, even with issuers and customers lined-up, to offer the triple-threat value proposition that Visa does.

Additionally, a potential new network would have extremely high entry costs. Some examples: creating the network infrastructure, convincing other issuers to break long-term contracts with Visa and Master Card, advertising persuasive enough to get a high volume of consumers, and withstanding competitive responses from Visa and/or MasterCard.lxvii Put simply, the costs to enter the payments domain as a network are likely too steep for any company to manage.

However, that does not mean that non-network alternatives are also doomed. In other words, there is a difference between a company trying to create a new network and a company that offers payment options which do not use networks. PayPal and Blockchain are two concepts that fit this fold, and both were discussed above.

Again though, neither seems to be a material threat to Visa, or even the other networks at this point. PayPal is still closely tied with the networks through its debit/credit card account link. And Blockchain is still too much of an infant to accurately gauge its adversarial potential.

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Nonetheless, Visa is clearly very aware of Blockchain, hence its investment in Chain.com.

Then there is cash – the oldest network alternative. A staple of many consumers’ pockets throughout history, cash, fortunately for the networks, is becoming less relevant in today’s economy. In fact, according to a 2014 Federal Reserve study, cash/check only made up 33% of the value of payments transacted in the US. lxviii

Source: US Federal Reserve

Additionally, in Europe, the share of cash payments is expected to decline another 22% in 2020, relative to 2005.

Source: Statista, AT Kearney

Also worth mentioning, in North America, using cash most frequently as a payment instrument is expected to decline 9%, while using a network based instruments most frequently is expected to rise 15%. Network based instruments includes credit/debit cards, prepaid cards, Apple/Samsung Pay, and card linked digital transactions.

Lastly, as of 2015, online shoppers preferred credit cards, digital payments, and debit cards to cash on delivery.

Source: Statista

In sum, the most traditional network alternative, cash, is being used less frequently, for lesser amounts of payments, and is less preferred relative to other payment methods. As such, it’s reasonable to infer that that the viability of cash as a network alternative is meager and declining.

ECONOMIC OUTLOOK

A major economic driver of transaction volume, and in turn Visa’s profitability, is consumer spending. On the one hand, annual US consumer spending has grown at a CAGR of approx. 2.5% over the last 3 years, reaching an all-time high in Jan. 2016.

Source: Trading Economics; US Bureau of Economic Analysis

On the other hand, average daily US consumer spending dropped to its lowest level in a year in January, before picking back up a tick in February.

Source: Statista

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It would seem that the decline in oil would spur an increase in spending but it appears that the extra income from lower gas prices is being saved instead.lxix

Additionally, stock markets have gotten off to a turbulent start in 2016, dampening expectations for economic growth this year.lxx

Accordingly, the Index of Consumer Sentiment was at 91.7 in February 2016, down 3.9% year-over-year.

Source: University of Michigan Surveys of Consumers

However, Q4 GDP was revised up to 1%, surpassing the expectation of 0.8%.

lxxii

lxxi Additionally, personal income rose 0.5%, another pleasant surprise for labor markets and wage inflation.

Indeed, the direction of economic growth and consumer spending for 2016 is foggy. However, we expect the US economy to remain in a low-growth state, likely seeing one more rate hike before the year is over. In such a scenario, consumer spending will not fluctuate enough to impact Visa’s growth trajectory.

The secular nature of the shift from cash to plastic and digital payments will boost Visa’s volume in most feasible economic scenarios for 2016. In other words, since consumers’ choice of payment method is independent of macroeconomic variables the preference for non-cash purchases will likely generate revenue growth for Visa in 2016, even if the economy slightly dips negative.

Also, despite the headwinds facing global markets, it is plausible that international economic conditions and consumer spending improve relative to the US.lxxiii

lxxiv

Since Visa is movingtoward a more international mix of payments volume with the Visa Europe deal, this would certainly be welcome. Further, Visa does not compete in China, which means its growth will not be directly impacted by what happens there.

Ultimately, we do not have a great feel for the macro-economies abroad but we do not expect extreme downturn or lift-off. In other words, our expected range is from slight downturn to low growth. And again, in such scenarios Visa should perform fine.

One note worth mentioning on the foreign scene is Visa’s cross-border fees. For example, underpenetrated markets where the local merchants differ from the traveler’s card issuer represent a source of great potential for cross-border fee growth in the near term.lxxv

In particular, rising tourism to India, which has grown at a 5.85% CAGR the past 5 years, could contribute to a pleasant surprise for Visa’s international transaction revenue.

Source: Statista; India Ministry of Tourism

In regards to the strengthening dollar, Visa hedges its currency exposure, and thus should not be significantly impacted by US dollar movements. In terms of the stock market, Visa has had a weekly Beta of around 0.91, so it is somewhat insulated from market-wide fluctuations too.

In sum, barring drastic scenarios, domestically and/or abroad, of deep recession or liftoff growth, Visa will not be severely impacted by macroeconomic variables.

CATALYSTS FOR GROWTH

• The Visa Europe acquisition closing, and producingexpected growth and synergies once integrated

• Capturing market-leading share of continued shiftfrom cash to card and digital based transactions

• Leveraging internal technological innovation andexternal investments properly

• Visa Checkout gaining wide-spread acceptance• Mobile wallets gaining even more prominence• Continuing to add large clients similar to Costco

and USAA

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• Global GDP lift-off, leading to leap in consumerspending

• Reinforcing value proposition and wideningcorresponding economic moats

• EMV and tokenization reducing fraud costs andtaking Visa’s reputation up another notch

INVESTMENT POSITIVES

• Visa increases market-leadership in a stableduopoly, that remains profitable enough toprevent destructive price competition

• Volume of non-cash transactions surges beyondcurrent projections

• Visa Checkout not only neutralizesdisintermediation risk, but also surpasses PayPalas leading payments gateway

• Visa continues to leverage internal innovation,such as the connected car, and externalinvestments, such as Stripe, in its favor

• Visa Europe deal integrates smoother thanexpected, bringing more growth than projected

• Macroeconomic growth, domestically andinternationally, far exceeds expectations, and inturn, triggers massive levels of consumer andtourist spending leading to windfalls for Visa’s 3revenue streams

• Security initiatives, EMV and tokenization are sosuccessful they bring in consumers that wouldotherwise be hesitant to use Visa paymentmethods

• China market access becomes a reality, opening up trillions in payments volume opportunity

• Blockchain becomes a friend of the networks,adding a payment rail for Visa to lead and operate

INVESTMENT NEGATIVES

• The duopoly de-stabilizes and a profit destructiveprice-war breaks out

• Non-cash transactions do not grow as expected, or even worse cash becomes more prevalent incommerce

• PayPal begins to syphon more payments fromcard-linked transfers to pure bank account ones,lessening Visa’s presence in the digital paymentsspace

• Visa Checkout fails to meet expectations, becomes an afterthought

• Visa Europe deal either falls through or closes anddoes not integrate smoothly, thus leading to Visa’s inability to capitalize on the European marketopportunities

• Visa is unable to gain more large-clients,stagnating into a low growth state

• EMV and tokenization do not reduce fraud, andVisa suffers large monetary and reputational costsas a result

• The global business cycle slides into severerecession, tightening consumer spending andtravel

• Blockchain becomes a foe of the networks,disrupting the industry, and creating brand newpayment rails that completely leave Visa out

VALUATION

Given that Visa is currently trading at approx. $71, and the EP/DCF model produces an intrinsic value of approx. $91, there is approx. 27% upside available to capture.

Time horizon: We set it at 8 years because the Visa Europe acquisition should close by the end of 2016. Hence, we expect growth stemming from the Visa Europe acquisition to kick-in by 2017 and be fully phased-in by 2021, before beginning to stabilize in 2023.

Cost structure: Given Visa’s capital lightness, scalability, and historical decline of costs, we fixed Visa’s expenses at stable percentages of revenue for our forecast. For depreciation/amortization, we fixed that as a percentage of PP&E, in line with historical trends.

Service revenue growth: Payments volume drives service revenues – the largest portion of Visa’s top-line growth. Accordingly, the most important assumptions relate to this driver. Non-cash transactions and market share of such transactions seem to be the most significant factors for payments volume growth. This makes sense: the more non-cash transactions that occur globally, the more money is likely to flow through Visa’s network. Non-cash transactions grew from 2009-2013 at a CAGR of 7.90% per the most recent data from the World Payments Report.lxxvi We project a higher CAGR from 2016-2023 of 10.47%.

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Source: World Payments Report; model projections

This higher growth is based on the trends indicating declines in cash payments, increasing proliferation of digital payments, and broader technological innovation in this arena. The data supporting this basis is discussed at length throughout this report.

We also expect Visa’s market share of non-cash transactions to increase from 58% in 2014 (most recent data) to a peak of 64% in 2017, stabilizing there for 5 years, before slightly declining as Visa approaches steady state. The big jump in 2017 is due to the expectation that the growth from Visa Europe will have started to kick-in. Additionally, we expect the Costco and USAA contracts, along with Visa’s technological development, to also help expand market share.

With market share and non-cash transaction projections in tow, we were able to project payments volume as a product of the 2. For example, in 2018 we expect 12% growth in non-cash transactions, with Visa’s market share at 64%, thus, payments volume growth for 2018 is 12%*64%=8.68%.

With payments volume projected, the next step was projecting a service revenue yield in order to get our final service revenue number. The 2011-2015 CAGR for service revenue yield was 1.70%, but we adjusted our forecast CAGR up to 1.85% because of the trend in declining transaction size discussed earlier in the report. In other words, with more frequent “swipes” Visa will churn a higher percentage of payments volume into service revenue.

Overall, based on the explanations directly above and the information presented throughout this report, we project service revenue to grow at a 9.5% CAGR, slightly lower than the 2011-2015 rate of 10.28%. The reason this ends up lower than historical, despite our optimism, is because we expect Visa to grow at a decreasing rate, after peaking in 2017, in order to approach its steady state sensibly.

Data processing revenue: This is driven by number of processed transactions and the fee charged per transaction. The number of processed transactions had a historical CAGR of 8.65%, we projected an 8.98% CAGR for 2016-2023. We went slightly higher than historical because we expect Visa Europe to add at least 18B processed transactions by 2017, given that they processed 18B in 2015, this seems reasonable.

Additionally, we expect Visa Checkout and mobile wallets to contribute to processed transaction growth.

Regarding the fee charged per processing transaction, we actually projected a decline, as discussed earlier in the report. Specifically, this fee’s 2011-2015 CAGR was 3.45%, but we project a 2016-2023 CAGR of -0.22% because of the fee compression likely to stem from increased competition in the processing arena.

Equipped with a number of processed transactions and the cents per transaction processing fee, we were able to project data processing revenues as a product of the 2. For example, 2019 projected processed transactions is approximately 106B and projected processing revenues is 7.78 cents. Therefore, 7.78 cents*106B = 8235M in processing revenue.

Overall, we project that processing revenue will grow at an 8.74% CAGR, relative to the 12.4% CAGR in 2011-2015. The lower projected rate is due to the fee compression and the declining growth as Visa approaches steady state.

International transactions: This is driven by the number of international payments that trigger cross-border fees. Such payments occur when the merchant and issuer bank reside in different countries. For example, if a consumer gets a Visa card from a local bank in the US, then travels to India, and buys something from a local merchant, then Visa charges a fee.

First, we had to project international payments volume. Given the information related to the Visa Europe transaction, it appears that at least 55% of Visa’s payments volume will be international after the deal closes.

We then multiplied 55% by the projected total payments volume (see above in the service revenues discussion), to get the international payments volume number. Once that number was in place, the next step was projecting the international revenue yield. The 2011-2015 CAGR for this figure was 1.05%, we projected a decline of -1.67% CAGR

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2016-2023. This is because Visa will now have contracts with European issuers that it didn’t have before, which decreases the odds of the differing issuer/merchant transactions that trigger cross-border fees.

Overall, we expect international transaction revenue to grow at a 7.87% CAGR 2016-2023, a bit lower than the 11% CAGR from 2011-2015. Again, this stems from the fee compression, with more foreign issuers on Visa’s network, and the natural declining rate of growth as it approaches steady state.

Relative to analyst estimates: According to FactSet data, our projected top-line revenue growth is a bit more aggressive than analyst estimates. Specifically, by about $500M in 2016, $1B in 2017, and $800M in 2018. However, analysts’ are projecting a lower cost structure, and failed to include the interest expense, from Visa’s December bond issuance, in their projections. Therefore, despite higher top-line projections, our EPS is a bit lower than consensus. Specifically, we project $2.75, $3.19 and $3.56, whereas they project $2.80, $3.25, and $3.77. They may also be expecting larger repurchases than we are, which would also explain the discrepancy.

CV growth of NOPLAT: A CV Growth of NOPLAT of 3%- 3.5% is appropriate because the global GDP should grow in the 4-5% nominal range. Given that 2015 nominal GDP was approximately 5.7%, this is reasonable.lxxvii Put differently, Visa should grow, in its steady state, at a slightly lower clip than the global economy. Global GDP is the appropriate benchmark here because Visa’s geographical payments volume breakdown should be about 45% US and 55% abroad after the Visa Europe acquisition.

Risk premium: We set the risk premium at 5% because we felt that was an accurate reflection of risk in the market going forward.

Beta: The Beta for this model was 1.00 based on Visa’s weekly Beta data on Bloomberg. More specifically, Visa’s weekly Beta ranged from .916 to 1.06 over the last 10 years.lxxviii

Cost of debt: 3.892% based on Visa’s 30-year corporate bond as of COB 3/8/2016, expiring in 2045. lxxix

Risk-free rate: 30-year US Treasury as of COB 3/8/2016 for the risk-free rate.lxxx

DDM: The DDM delivers a lower price than the EP/DCF, approx. $76 vs $90 (or roughly 18% difference). This likely stems from more aggressive projected NOPLAT growth than dividend growth over the next 8 years. Recently, Visa’s dividend ratio has been around 20% but we see it increasing to 22.5% 2017-2019, then 25% 2020-2023. This is based on the notion that Visa will have excess cash, and will thus want to distribute a higher portion of it back to shareholders. Also, the CV Growth of EPS is 0.3-0.5%% higher than CV Growth of NOPLAT, because of projected annual repurchases for the next 8 years.

Relative valuation: The relative valuation model produces steeply discounted prices compared to the EP/DCF and DDM prices. Additionally, the lower EPS projections, relative to both the Street’s estimates for Visa and the other companies included in this comparison model likely contribute to the discount. Also, our projected near-term EPS does not reflect the long-term growth we expect Visa achieve, nor does the average P/E derived in this model account for the growth prospects we envision for Visa. Consequently, a lower EPS combined with a relative P/E multiple that does not fit our growth expectations leads to this model’s discounted price. Most importantly, and as discussed in the Markets and Competition section above, MasterCard is the only true competitor. Therefore, a relative valuation with Visa is not very informative.

EP/DCF model evaluation and intrinsic value: Ultimately, we used the EP/DCF analysis to determine the target price of $91. This model is the most accurate for the intrinsic value because it best captures the underlying economics of Visa and its operations. Additionally, it best incorporates Visa’s potential based on the trends in non-cash transactions, technological innovation – within Visa and externally, the Visa Europe acquisition, and organic growth through large clients such as Costco and USAA.

Also, the EP/DCF model is quite robust as the price only turns bearish in extreme scenarios. Such scenarios include: a Beta as high as Visa’s highest weekly Beta in the last 10 years and a CV Growth of NOPLAT at less than 1/3 of 2015 Global GDP; risk premium approximately 1.5% higher than the historical geometric average; 2023E revenues $4B (or 15%) less than current projections.

Put simply, the EP/DCF model is consistently bullish across all plausible scenarios for key inputs and assumptions. Moreover, Visa has stout economic moats that, while not explicitly illustrated in revenue growth projections, will

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protect Visa’s profitability for the foreseeable future. These moats include Visa’s value proposition, scalability, and brand equity, and have been discussed at length throughout this report.

Since the EP/DCF model also considers profitability, through the EBITA and NOPLAT lenses, it is the only model that can account for Visa’s wide and profitable economic moat. Thus, the EP/DCF model is the most comprehensive way to measure Visa’s intrinsic value.

KEYS TO MONITOR

• Visa Europe deal – should close by 3Q 2016, should add at least 18B in processed transactions, shouldenable Visa to capture some of the $3T marketopportunity in Europe; would like to see the1/5.70 Euros spent using Visa rate continue orincrease

• Non-cash transaction growth rate – ideally in the10-11% CAGR range

• Visa’s market-share of non-cash transactions –ideally in the 63-65% range

• Service revenue yield growth – ideally in the 1.85% CAGR range

• Number of processed transactions growth rate –ideally in the 8-10% CAGR range

• International revenue yield– ideally in the 0.155%to 0.170% range

• Operating margin – ideally in the 65-67% range• Visa Checkout usage – no specific number set but

momentum and more mainstream use would begood signs

• Other digital developments – Chain.com,connected cars, etc.

Ultimately, Visa combines the benefits of a blue-chip market leader, with the innovation of a hot growth start-up. This dexterity and the secular shift away from cash align well for Visa to continue growing – quite profitably. Especially, given its competitive advantage that is protected by strong brand equity, rare network resource, unique value proposition, and scalability. In short, it’s plain to see why Visa is undervalued at $70.62, and has approximately 29% upside at a target price of $91. Accordingly, we recommend a BUY for Visa Inc.

REFERENCES

i. Visa Inc. 10K, November 2015ii. Visa 10K, see i

iii. Visa 10K, see iiv. Visa Europe

FAQ, https://www.visaeurope.com/newsroom/faqsv. Visa 10K, see i

vi. ThompsonONE, William Blair Equity Research, “Strongand Steady Spending Trends, Cross-Border Slowdownand Currency Mask Strength”, January 2016

vii. Visa 10K, see iviii. Owen, Brett. “This Stock is the Undisputed Mobile

Payment Winnter”, Forbes, February2016, http://www.forbes.com/sites/brettowens/2016/02/20/this-stock-is-the-undisputed-mobile-payment-winner/?utm_campaign=yahootix&partner=yahootix#2e47a6a239f3

ix. Forbes, May2015, http://www.forbes.com/companies/visa/ ;Fortune, January 2016, http://fortune.com/worlds-most-admired-companies/visa-47/

x. Visa Inc., https://usa.visa.com/run-your-business/small-business-tools/payment-technology/visa-paywave.html

xi. Juniper Research, September2015, http://www.juniperresearch.com/press/press-releases/contactless-mobile-wallets-to-reach-200mn-by-2016

xii. Kim, Eugene, “Visa owns 4.2 million Square shares thatcould turn into 10% of the company’s publicly tradedstock”, Business Insider, February2016, http://www.businessinsider.com/visa-now-owns-999-of-square-2016-2

xiii. Rao, Leena, “Stripe’s new funding makes it a $5 billioncompany”, Fortune, July2015, http://fortune.com/2015/07/28/stripe-visa/

xiv. Costco, March 2015, http://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-newsArticle&ID=2021495

xv. Malcolm, Hadley, “Costco profit falls in Q2, sales hurtin foreign markets,” USA Today, March2016, http://www.usatoday.com/story/money/2016/03/03/costco-second-quarter-earnings/81257996/

xvi. CostcoFAQ, https://customerservice.costco.com/system/templates/selfservice/costco_en_us/#!portal/200500000001002/article/200500000032922/CitiVisa-Co-brand-Credit-Card

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xvii. Reuters, “USAA says switches to Visa from MasterCard”, October 2015, http://www.reuters.com/article/us-usaa-visa-idUSKCN0SI0VU20151024

xviii. Reuters, see xvii xix. ThompsonONE, Trefis, “Note for NYSE: V”, November

2015 xx. Dexheimer, Elizabeth, “Visa Agrees to Buy Visa Europe

for as Much as $23.4B”, Bloomberg, http://www.bloomberg.com/news/articles/2015-11-02/visa-agrees-to-buy-visa-europe-for-as-much-as-23-4-billion

xxi. Visa Europe FAQ, see iv xxii. Dexheimer, see xx

xxiii. Dexheimer, see xx xxiv. Visa 10K, see i xxv. Visa 10K, see I

xxvi. Visa Europe Annual Report, November 2015 xxvii. Visa Europe FAQ, see iv

xxviii. Visa 10K, see i xxix. Visa 10K, see i xxx. Visa Europe Annual Report, see xvi; Visa 10K, see i

xxxi. Visa Inc., “Visa Checkout Launching Across Europe and India”, February 2016, https://usa.visa.com/about-visa/newsroom/press-releases.releaseId.2141369.html?linkId=21487688

xxxii. PwC, Global Total Retail Survey 2016 Key Findings, 2016, http://www.pwc.com/gx/en/industries/retail-consumer/global-total-retail.html

xxxiii. Visa Inc., Visa Checkout FAQ, https://secure.checkout.visa.com/customer_support/faq?locale=en

xxxiv. Visa Checkout FAQ, see xxxiii xxxv. Visa Inc., Visa Checkout

Infographic, https://checkout.visa.com/business/assets/infographic.pdf

xxxvi. Visa Checkout Infographic, see xxxv xxxvii. Visa Checkout FAQ, see xxxiii

xxxviii. Visa Inc., “Visa’s Innovation Center is a Big Success”, https://usa.visa.com/visa-everywhere/innovation/visa-innovation-center.html

xxxix. Kharpal, Arjun, “Visa wants your car to become your new credit card”, CNBC, February 2016, http://www.cnbc.com/2016/02/22/visa-wants-your-car-to-become-your-new-credit-card.html

xl. Kharpal, see xxix; Accenture Consulting, https://www.accenture.com/us-en/success-visa-connected-commerce-car.aspx

xli. Meola, Andrew, “Apple Pay and Samsung Pay continue to dominate market”, Business Insider, March 2016, http://www.businessinsider.com/apple-pay-samsung-pay-lead-mobile-wallet-growth-2016-3

xlii. FactSet, V, Surprise History xliii. Austin, Bridgette, “Are Chip-and-PIN Cards Worth It?

Cost-Benefit Analysis of EMV Compliance”, intuit QuickBooks, April 2015, http://quickbooks.intuit.com/r/technology-and-security/are-chip-and-pin-cards-worth-it-cost-benefit-analysis-of-emv-compliance

xliv. Kossman, Sienna. “8 FAQs about EMV credit cards”, CreditCards.com, http://www.creditcards.com/credit-card-news/emv-faq-chip-cards-answers-1264.php

xlv. Kossman, see xliv xlvi. Kossman, see xliv

xlvii. Visa Inc., Chip Technology Infographic, February 2016, https://usa.visa.com/dam/VCOM/download/visa-everywhere/security/visa-us-chip-adoption.pdf

xlviii. Visa Inc. Chip Technology Infographic, see xlvii xlix. McKinsey & Company, “16 in 2016: Trailblazing trends

in global payments”, October 2015, http://www.mckinsey.com/client_service/financial_services/latest_thinking/payments

l. ThompsonONE, Cowen and Company, “Initiate V at Outperform”, Equity Research Report, September 2015

li. ThompsonONE, UBS Global Research, “MasterCard Inc: International Recovery and Expansion to Prove ‘Priceless’ for Driving Growth”, December 2015

lii. Trefis, see xix liii. Cowen and Company, see l; UBS, see li liv. McKinsey, see xlviii lv. McKinsey, see xlviii

lvi. Shin, Laura, “Visa, Cit, Nasdaq Invest $30 Million in Blockchain Startup Chain.com”, Forbes, September 2015, http://www.forbes.com/sites/laurashin/2015/09/09/visa-citi-nasdaq-invest-30-million-in-blockchain-startup-chain-com/#198294559143

lvii. Shin, see lvi lviii. Moorjani, Ashvin. “Visa: Market Power, Stable Growth

and High Profitability Doesn’t Come Cheap”, Seeking Alpha, May 18 2015, http://seekingalpha.com/article/3193266-visa-market-power-stable-growth-and-high-profitability-doesnt-come-cheap

lix. Moorjani, see lviii lx. Moorjani, see lviii

Page 20

lxi. Statista, http://www.statista.com/statistics/245385/number-of-credit-cards-by-credit-card-type-in-the-united-states/

lxii. Udland, Myles. “For American Express, ‘everything is moving in the wrong direction”, February 13 2015, http://www.businessinsider.com/wall-street-analysts-on-amex-costco-deal-2015-2

lxiii. Statista, http://www.statista.com/statistics/284108/reasons-for-non-usage-of-digital-wallets-in-the-united-states/

lxiv. Moorjani, see lviii lxv. Moorjani, see lviii

lxvi. Moorjani, see lviii lxvii. Moorjani, see lviii

lxviii. Bennett, Barbra. Conover, Douglas. O’Brien, Shaun. Advincula, Ross. “Cash continues to Play a Key Role in Consumer Spending: Evidence from the Diary of Consumer Payment Choice”, April 2014

lxix. The Economist, “Weak American growth is probably a blip”, January 2016, http://www.economist.com/news/finance-economics/21689741-slower-consumer-spending-dragged-down-growth-americans-are-flush?zid=295&ah=0bca374e65f2354d553956ea65f756e0

lxx. University of Michigan, “Surveys of Consumers”, February 2016, http://www.sca.isr.umich.edu/

lxxi. Bloomberg Economic Calendar, February 26, 2016 lxxii. Bloomberg Economic Calendar, see lxxii

lxxiii. UBS, see li lxxiv. UBS, see li lxxv. NetAdvantage, S&P Capital Industry Surveys, “IT

Services”, September 2015 lxxvi. World Payments Report 2015, produced by Royal Bank

of Scotland and Capgemini, see https://www.worldpaymentsreport.com/

lxxvii. Global Real GDP was 2.4% via World Bank, see http://www.worldbank.org/en/publication/global-economic-prospects, January 2016; Inflation Rate was 3.31% via Statista, see http://www.statista.com/statistics/256598/global-inflation-rate-compared-to-previous-year/

lxxviii. Bloomberg Terminal, February 2016, see WACC page of model for breakdown

lxxix. FINRA, Bond Center, March 2016, see http://finra-markets.morningstar.com/BondCenter/Results.jsp

lxxx. US Treasury, March 2016, see https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

IMPORTANT DISCLAIMER

Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa’s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.

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VisaRevenue Decomposition

Fiscal Years Ending Sept. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023EService revenue drivers (in billions)Payments volume, total 4197 4567 4884 5357 5925 6439 6915 7383 7882 8352 8736Total pmts. YOY Growth 7.62% 8.82% 6.94% 9.68% 10.60% 8.68% 7.40% 6.76% 6.76% 5.96% 4.60%

Service revenue yield % (percentage of payment volume that translates into service revenue )

0.128% 0.127% 0.129% 0.131% 0.134% 0.136% 0.139% 0.141% 0.144% 0.147% 0.149%

Service rev yield YOY growth 2.08% ‐0.46% 1.66% 1.85% 1.85% 1.85% 1.85% 1.85% 1.85% 1.85% 1.85%Service revenue (in millions) 5352 5797 6302 7040 7931 8779 9603 10442 11355 12254 13056

Service rev YOY growth 9.85% 8.31% 8.71% 11.71% 12.65% 10.69% 9.39% 8.74% 8.74% 7.92% 6.54%

Data processing revenue driversVisa processed transactions (in millions) 58472 64993 70968 78776 88229 97052 105787 115308 124532 133250 141245Visa processed transactions YOY growth 9.65% 11.15% 9.19% 11.00% 12.00% 10.00% 9.00% 9.00% 8.00% 7.00% 6.00%

Data processing revenue (cents per transaction)7.94 7.95 7.82 7.82 7.81 7.80 7.78 7.76 7.74 7.71 7.68

Data processing rev per transaction YOY growth 6.50% 0.14% ‐1.60% ‐0.05% ‐0.10% ‐0.15% ‐0.20% ‐0.25% ‐0.30% ‐0.35% ‐0.40%Data processing revenue (in millions) 4642 5167 5552 6160 6892 7570 8235 8954 9641 10280 10853

Data processing rev YOY growth 16.78% 11.31% 7.45% 10.95% 11.89% 9.84% 8.78% 8.73% 7.68% 6.63% 5.58%

International transaction fee drivers Payments volume, int'l  2030 2198 2290 2464 3259 3541 3803 4061 4335 4593 4805Int'l pmts. Vol. YOY growth  10.69% 8.28% 4.19% 7.60% 32.24% 8.68% 7.40% 6.76% 6.76% 5.96% 4.60%

Int'l pmts. Vol. as % of total pmts. Vol.  48.37% 48.13% 46.89% 46.00% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00% 55.00%Int'l pmts. Vol. YOY growth  2.85% ‐0.50% ‐2.58% ‐1.89% 19.57% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Int'l transaction fee yield % (percentage of int'l payment volume that translates into international transaction fees) 0.167% 0.162% 0.177% 0.176% 0.160% 0.157% 0.157% 0.157% 0.157% 0.157% 0.155%

Int'l transaction fee yield YOY growth 1.22% ‐2.98% 9.57% ‐1.00% ‐9.00% ‐2.00% 0.00% 0.00% 0.00% 0.00% ‐1.00%

International transaction fees  3389 3560 4064 4329 5210 5549 5959 6362 6792 7197 7453Int'l transaction fee YOY growth 12.03% 5.05% 14.16% 6.53% 20.34% 6.51% 7.40% 6.76% 6.76% 5.96% 3.55%

VisaIncome Statement (in millions, except per share data)

Fiscal Years Ending Sept. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023EOperating RevenuesService revenues 5352 5797 6302 7040 7931 8779 9603 10442 11355 12254 13056Data processing revenues 4642 5167 5552 6160 6892 7570 8235 8954 9641 10280 10853International transaction fees 3389 3560 4064 4329 5210 5549 5959 6362 6792 7197 7453Other revenues 716 770 823 853 885 917 951 986 1022 1059 1098Client incentives (2321) (2592) (2861) (3125) (3556) (3878) (4207) (4546) (4898) (5234) (5518)Total operating revenues 11778 12702 13880 15258 17361 18936 20541 22197 23912 25556 26941

Operating ExpensesPersonnel expenses 1932 1875 2079 2136 2430 2651 2875 3107 3347 3577 3771Marketing 876 900 872 916 1042 1136 1233 1332 1435 1533 1617Network & processing 468 507 474 534 607 662 718 776 836 894 942Professional fees 412 328 336 382 434 474 514 556 598 640 674Depreciation & amortization 397 435 494 472 660 750 819 888 959 1034 1105General & administrative expenses 451 507 547 534 607 663 719 777 837 894 943Litigation provision (benefit) 3 453 14 10 10 10 10 10 10 11 11Total operating expenses 4539 5005 4816 4983 5791 6346 6888 7446 8023 8582 9062Operating income 7239 7697 9064 10275 11570 12590 13653 14751 15889 16974 17879Non‐operating (expense) income 18 27 (69) 0 0 0 0 0 0 0 0Interest expense 0 0 0 (500) (500) (500) (445) (445) (445) (351) (351)Income before income taxes  7257 7724 8995 9775 11070 12090 13208 14306 15444 16623 17529Income tax provision  2277 2286 2667 3226 3653 3990 4359 4721 5096 5486 5785Net Income 4980 5438 6328 6549 7417 8100 8849 9585 10347 11138 11744

Basic weighted‐avg. shares outstandingClass A Common Stock  2080 1993 1954 1905 1859 1818 1779 1737 1698 1661 1628Class B Common Stock 245 245 245 245 245 245 245 245 245 245 245Class C Common Stock 28 26 22 20 20 20 20 20 20 20 20

Approx. Net Income Allocation per Class (%)Class A Common Stock 79.36% 79.16% 79.67% 80% 80% 80% 80% 80% 80% 80% 80%Class B Common Stock 15.74% 16.35% 16.49% 16% 16% 16% 16% 16% 16% 16% 16%Class C Common Stock  4.28% 4.14% 3.59% 4% 4% 4% 4% 4% 4% 4% 4%

Note: doesn’t always add up to 100% b/c of misc. adjustments such as minority interest, other participating securities <1%, rounding, etc. 

Approx. Net Income Allocation per Class ($) Class A Common Stock 3952 4305 5042 5239 5934 6480 7080 7668 8278 8910 9395Class B Common Stock 784 889 1043 1048 1187 1296 1416 1534 1656 1782 1879Class C Common Stock  213 225 227 262 297 324 354 383 414 446 470

Basic EPS Class A Common Stock  1.90 2.16 2.58 2.75 3.19 3.56 3.98 4.41 4.88 5.36 5.77Class B Common Stock 3.20 3.63 4.26 4.28 4.84 5.29 5.78 6.26 6.76 7.27 7.67Class C Common Stock 7.61 8.65 10.33 13.10 14.83 16.20 17.70 19.17 20.69 22.28 23.49

Dividends paid 864 1006 1177 1333 1669 1823 1991 2396 2587 2784 2936Class A Common Stock 686 796 938 1067 1335 1458 1593 1917 2069 2228 2349Class B Common Stock 136 164 194 213 267 292 319 383 414 446 470Class C Common Stock 37 42 42 53 67 73 80 96 103 111 117Dividends per share (Class A)  0.33 0.40 0.48 0.56 0.72 0.80 0.90 1.10 1.22 1.34 1.44

Note: 2011 and 2012 are adjusted for 2015 stock split in order to remain consistent

VisaBalance Sheet (in millions, except par value data)

Fiscal Years Ending Sept. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023EAssetsCash & cash equivalents 2186 1971 3518 1193 1467 2201 5259 8414 9140 13457 15972Restricted cash ‐ litigation escrow 49 1498 1072 1078 1084 1090 1096 1102 1108 1114 1120Investment securities, trading 75 69 66 66 66 66 66 66 66 66 66Investment securities, available‐for‐sale 1994 1910 2431 2658 2658 2658 2658 2658 2658 2658 2658Settlement receivable 799 786 408 915 1042 1136 1232 1332 1435 1533 1616Accounts receivable 761 822 847 2594 2951 3219 3492 3774 4065 4345 4580Customer collateral 866 961 1023 1153 1313 1432 1553 1678 1808 1932 2037Current portion of client incentives 282 210 303 343 391 426 462 499 538 575 606Prepaid expenses & other current assets 329 307 353 413 470 513 557 602 648 693 730Total current assets 7341 8534 10021 10415 11442 12741 16375 20125 21466 26372 29386Investment securities, available‐for‐sale 2760 3015 3384 3496 3559 3623 3688 3754 3822 3891 3961Client incentives 89 81 110 111 127 138 150 162 175 187 197Property, equipment & technology, net 1732 1892 1888 2638 3002 3274 3552 3838 4134 4419 4658Total other assets 521 855 776 0 0 0 0 0 0 0 0Intangible assets 11351 11411 11361 11481 11481 11481 11481 11481 11481 11481 11481Goodwill 11681 11753 11825 33384 33384 33384 33384 33384 33384 33384 33384Total assets 35475 37541 39365 61525 62994 64641 68630 72744 74462 79733 83066

Liabilities Accounts payable 184 147 127 2289 2604 2840 3081 3330 3587 3833 4041Settlement payable 1225 1332 780 1373 1563 1704 1849 1998 2152 2300 2425Customer collateral 866 961 1023 1153 1313 1432 1553 1678 1808 1932 2037Accrued compensation & benefits 523 450 503 618 703 767 832 899 968 1035 1091Client incentives 919 1036 1049 1137 1293 1411 1530 1654 1781 1904 2007Accrued liabilities 613 624 868 676 769 839 910 983 1059 1132 1194Accrued litigation 5 1456 1024 1024 1030 1035 1041 1047 1052 1058 1064Total current liabilities 4335 6006 5374 8270 9274 10028 10796 11588 12408 13195 13859Deferred taxes, net 3668 3117 3252 3217 3217 3217 3217 3217 3217 3217 3217Long‐term debt 0 0 0 15877 15877 14127 14127 14127 11127 11127 8877Total other liabilities 602 1005 897 1222 1391 1517 1645 1778 1915 2047 2158Total liabilities 8605 10128 9523 28586 29759 28889 29785 30710 28668 29586 28111

EquityCommon stock 18875 18299 18073 18280 18502 18741 18976 18976 18976 18976 18976Accumulated income 7974 9131 11843 17059 22807 29085 35943 43132 50893 59246 68054Treasury Stock  0 0 0 (4000) (8000) (12000) (16000) (20000) (24000) (28000) (32000)Visa Europe retained earnings  0 0 0 1675 0 0 0 0 0 0 0Total accumulated other comprehensive income (loss), net 21 (17) (74) (74) (74) (74) (74) (74) (74) (74) (74)Total Visa inc. stockholders' equity 26870  27413  29842  32939  33235  35752  38845  42034  45794  50147  54956 Total liabilities and equity 35475 37541 39365 61525 62994 64641 68630 72744 74462 79733 83066

VisaCash Flow Statement (in millions)

Fiscal Years Ending Sept. 30 2013 2014 2015Operating Activities Net Income  4980 5438 6328Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of client incentives 2321 2592 2861Fair value adjustment for Visa Europe Put option ‐ ‐ 110Share‐based compensation 179 172 187Excess tax benefit for share‐based compensation (74) (90) (84)Depreciation & amortization of property, equipment & technology

397 435 494

Deferred income taxes 1527 (580) 195Litigation provision  3 453 14Other 50 37 24

Change in operating assets and liabilities:Settlement receivable  (345) 13 378Accounts receivable (38) (53) (19)Client incentives (2336) (2395) (2970)Other assets (506) (379) (41)Accounts payable 40 (56) (13)Settlement payable 506 107 (552)Accrued & other liabilities 702 513 118Accrued litigation (4384) 998 (446)

Net cash flows from operating activities 3022 7205 6584

Investing Activities Purchases of property, equipment, technology & intangible assets (471) (553) (414)

Proceeds from sales of property, equipment & technology 0 0 10Purchases of investment securities, available‐for‐sale (3164) (2572) (2850)Proceeds from sales & maturities of investment securities, available‐for‐sale

2440 2342 1925

Acquisitions, net of cash received ‐ (149) (93)Purchases of / contributions to other investments (3) (9) (25)Proceeds / distributions from other investments 34 ‐ 12Net cash flows used in investing activities (1164) (941) (1435)

Financing Activities Repurchase of class A common stock (5365) (4118) (2910)Dividends paid (864) (1006) (1177)Deposits into litigation escrow account ‐ retrospective responsibility plan

‐ (450) ‐

Payments from (return to) litigation escrow account ‐ U.S. retrospective responsibility plan

4383 (999) 426

Cash proceeds from exercise of stock options 108 91 82

Restricted stock & performance shares settled in cash for taxes(64) (86) (108)

Excess tax benefit for share‐based compensation 74 90 84Principal payments on capital lease obligations (6) ‐ ‐Payments for earn‐out related to PlaySpan acquisition (12) ‐ ‐Principal payments on debt ‐ ‐ ‐Net cash flows used in financing activities (1746) (6478) (3603)

Effect of exchange rate changes on cash & cash equivalents ‐ (1) 1Increase (decrease) in cash & cash equivalents 112 (215) 1547Cash & cash equivalents at beginning of year 2074 2186 1971Cash & cash equivalents at end of year 2186 1971 3518

VisaCash Flow Statement (in millions)

Fiscal Years Ending Sept. 30 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023EOperating Activities Net Income  6549 7417 8100 8849 9585 10347 11138 11744Adjustments to reconcile net income to net cash provided by operating activities:

Change in litigation escrow  (6) (6) (6) (6) (6) (6) (6) (6)Change in deffered taxes, net  (35) 0 0 0 0 0 0 0

Change in operating assets and liabilities:Settlement receivable  (507) (126) (94) (96) (99) (103) (99) (83)Accounts receivable (1747) (358) (268) (273) (282) (292) (279) (236)Customer Collateral  (130) (159) (119) (121) (125) (130) (124) (105)Current Portion of Client Incentives  (40) (47) (35) (36) (37) (39) (37) (31)Prepaid expenses & other current assets  (60) (57) (43) (43) (45) (46) (45) (38)Client incentives  (1) (15) (11) (12) (12) (13) (12) (10)Net PP&E  (750) (364) (272) (277) (286) (296) (284) (240)Accounts payable 2162 316 236 241 248 257 247 208Settlement payable 593 189 142 144 149 154 148 125Customer Collateral  130 159 119 121 125 130 124 105Accrued compensation and benefits 115 85 64 65 67 69 67 56Client incentives  88 157 117 120 123 128 122 103Accrued liabilities  (192) 93 70 71 73 76 73 61Accrued litigation  0 6 6 6 6 6 6 6Other liabilities  325 169 126 129 133 137 132 111

Net cash flows from operating activities 6492 7458 8131 8881 9617 10381 11169 11771

Investing Activities Change in total other assets  776 0 0 0 0 0 0 0(Increase) decrease in short‐term investments  (227) (0) (0) (0) (0) (0) (0) (0)(Increase) deecrease in long‐term investments  (112) (63) (64) (65) (66) (68) (69) (70)Change in intangibles  (120) 0 0 0 0 0 0 0Change in goodwill  (21559) 0 0 0 0 0 0 0Visa Europe acquisition  1675 (1675) 0 0 0 0 0 0Net cash flows used in investing activities (19567) (1738) (64) (65) (66) (68) (69) (70)

Financing Activities Repurchase of class A common stock (4000) (4000) (4000) (4000) (4000) (4000) (4000) (4000)Dividends paid (1333) (1669) (1823) (1991) (2396) (2587) (2784) (2936)Proceeds from issuance (payment) of long‐term debt 15877 0 (1750) 0 0 (3000) 0 (2250)Cash proceeds from exercise of stock options 207 222 239 234 0 0 0 0Net cash flows used in financing activities 10750 (5447) (7333) (5757) (6396) (9587) (6784) (9186)

Increase (decrease) in cash & cash equivalents (2325) 274 733 3059 3155 726 4316 2515Cash & cash equivalents at beginning of year 3518 1193 1467 2201 5259 8414 9140 13457Cash & cash equivalents at end of year 1193 1467 2201 5259 8414 9140 13457 15972

VisaCommon Size Income Statement(as % of sales)

Fiscal Years Ending Sept. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023ETotal Operating Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Service revenues 45.44% 45.64% 45.40% 46.14% 45.68% 46.36% 46.75% 47.04% 47.49% 47.95% 48.46%Data processing revenues 39.41% 40.68% 40.00% 40.37% 39.70% 39.98% 40.09% 40.34% 40.32% 40.22% 40.28%International transaction fees 28.77% 28.03% 29.28% 28.37% 30.01% 29.30% 29.01% 28.66% 28.41% 28.16% 27.66%Other revenues 6.08% 6.06% 5.93% 5.59% 5.10% 4.84% 4.63% 4.44% 4.27% 4.15% 4.08%Client incentives ‐19.71% ‐20.41% ‐20.61% ‐20.48% ‐20.48% ‐20.48% ‐20.48% ‐20.48% ‐20.48% ‐20.48% ‐20.48%

Total Operating Expenses 38.51% 35.84% 34.60% 32.59% 33.30% 33.46% 33.48% 33.50% 33.51% 33.54% 33.60%Personnel expenses 16.40% 14.76% 14.98% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00% 14.00%Marketing 7.44% 7.09% 6.28% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Network & processing 3.97% 3.99% 3.41% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%Professional fees 3.50% 2.58% 2.42% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%Depreciation & amortization 3.37% 3.42% 3.56% 3.09% 3.80% 3.96% 3.98% 4.00% 4.01% 4.04% 4.10%General & administrative expenses 3.83% 3.99% 3.94% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%Operating Profit  61.49% 64.16% 65.40% 67.41% 66.70% 66.54% 66.52% 66.50% 66.49% 66.46% 66.40%

Litigation provision (benefit) ‐0.03% ‐3.57% ‐0.10% ‐0.07% ‐0.06% ‐0.05% ‐0.05% ‐0.05% ‐0.04% ‐0.04% ‐0.04%Interest Expense 0.00% 0.00% 0.00% ‐3.28% ‐2.88% ‐2.64% ‐2.17% ‐2.00% ‐1.86% ‐1.37% ‐1.30%Non‐operating (expense) income 0.15% 0.21% ‐0.50% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Pre‐Tax Profit  61.61% 60.81% 64.81% 64.07% 63.77% 63.85% 64.30% 64.45% 64.59% 65.05% 65.06%Taxes 19.33% 18.00% 19.21% 21.14% 21.04% 21.07% 21.22% 21.27% 21.31% 21.47% 21.47%Total Profit  42.28% 42.81% 45.59% 42.92% 42.72% 42.78% 43.08% 43.18% 43.27% 43.58% 43.59%

VisaCommon Size Balance Sheet

Fiscal Years Ending Sept. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023ETotal Assets as % of Operating Revenue  301.20% 295.55% 283.61% 403.24% 362.84% 341.36% 334.11% 327.72% 311.40% 311.99% 308.32%Cash & cash equivalents 18.56% 15.52% 25.35% 7.82% 8.45% 11.62% 25.60% 37.91% 38.23% 52.66% 59.28%Restricted cash ‐ litigation escrow 0.42% 11.79% 7.72% 7.06% 6.24% 5.76% 5.33% 4.96% 4.63% 4.36% 4.16%Investment securities, trading 0.64% 0.54% 0.48% 0.43% 0.38% 0.35% 0.32% 0.30% 0.28% 0.26% 0.25%Investment securities, available‐for‐sale 16.93% 15.04% 17.51% 17.42% 15.31% 14.04% 12.94% 11.97% 11.12% 10.40% 9.87%Settlement receivable 6.78% 6.19% 2.94% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Accounts receivable 6.46% 6.47% 6.10% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00%Customer collateral 7.35% 7.57% 7.37% 7.56% 7.56% 7.56% 7.56% 7.56% 7.56% 7.56% 7.56%Current portion of client incentives 2.39% 1.65% 2.18% 2.25% 2.25% 2.25% 2.25% 2.25% 2.25% 2.25% 2.25%Prepaid expenses & other current assets 2.79% 2.42% 2.54% 2.71% 2.71% 2.71% 2.71% 2.71% 2.71% 2.71% 2.71%Total current assets 62.33% 67.19% 72.20% 68.26% 65.91% 67.28% 79.72% 90.66% 89.77% 103.19% 109.07%Investment securities, available‐for‐sale 23.43% 23.74% 24.38% 22.91% 20.50% 19.13% 17.95% 16.91% 15.98% 15.22% 14.70%Client incentives 0.76% 0.64% 0.79% 0.73% 0.73% 0.73% 0.73% 0.73% 0.73% 0.73% 0.73%Property, equipment & technology, net 14.71% 14.90% 13.60% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29% 17.29%Total other assets 4.42% 6.73% 5.59% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Intangible assets 96.37% 89.84% 81.85% 75.25% 66.13% 60.63% 55.89% 51.72% 48.01% 44.92% 42.61%Goodwill 99.18% 92.53% 85.19% 218.80% 192.29% 176.30% 162.52% 150.40% 139.61% 130.63% 123.91%Total non‐current assets 238.87% 228.37% 211.41% 334.98% 296.94% 274.08% 254.39% 237.05% 221.63% 208.80% 199.25%

Accounts payable 1.56% 1.16% 0.91% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%Settlement payable 10.40% 10.49% 5.62% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%Customer collateral 7.35% 7.57% 7.37% 7.56% 7.56% 7.56% 7.56% 7.56% 7.56% 7.56% 7.56%Accrued compensation & benefits 4.44% 3.54% 3.62% 4.05% 4.05% 4.05% 4.05% 4.05% 4.05% 4.05% 4.05%Client incentives 7.80% 8.16% 7.56% 7.45% 7.45% 7.45% 7.45% 7.45% 7.45% 7.45% 7.45%Accrued liabilities 5.20% 4.91% 6.25% 4.43% 4.43% 4.43% 4.43% 4.43% 4.43% 4.43% 4.43%Accrued litigation 0.04% 11.46% 7.38% 6.71% 5.93% 5.47% 5.07% 4.72% 4.40% 4.14% 3.95%Total current liabilities 36.81% 47.28% 38.72% 54.20% 53.42% 52.96% 52.56% 52.21% 51.89% 51.63% 51.44%Deferred taxes, net 31.14% 24.54% 23.43% 21.08% 18.53% 16.99% 15.66% 14.49% 13.45% 12.59% 11.94%Long‐term debt 0.00% 0.00% 0.00% 104.06% 91.45% 74.60% 68.78% 63.64% 46.53% 43.54% 32.95%Total other liabilities 5.11% 7.91% 6.46% 8.01% 8.01% 8.01% 8.01% 8.01% 8.01% 8.01% 8.01%Total liabilities 73.06% 79.74% 68.61% 187.36% 171.41% 152.56% 145.00% 138.35% 119.89% 115.77% 104.34%

Common stock 160.26% 144.06% 130.21% 119.81% 106.57% 98.97% 92.38% 85.49% 79.36% 74.25% 70.43%Accumulated income (deficit) 67.70% 71.89% 85.32% 111.81% 131.37% 153.59% 174.98% 194.31% 212.83% 231.83% 252.60%Repurchase amount 0.00% 0.00% 0.00% ‐26.22% ‐46.08% ‐63.37% ‐77.89% ‐90.10% ‐100.37% ‐109.56% ‐118.78%Visa Europe retained earnings 0.00% 0.00% 0.00% 10.98% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Investment securities, available‐for‐sale 0.50% 0.24% 0.04% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Defined benefit pension & other postretirement plans ‐0.51% ‐0.66% ‐1.16% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Derivative instruments classified as cash flow hedges 0.20% 0.30% 0.60% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Foreign currency translation adjustments ‐0.01% ‐0.02% ‐0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total accumulated other comprehensive income (loss), net 0.18% ‐0.13% ‐0.53% ‐0.49% ‐0.43% ‐0.39% ‐0.36% ‐0.33% ‐0.31% ‐0.29% ‐0.27%Total Visa inc. stockholders' equity 228.14% 215.82% 215.00% 215.89% 191.43% 188.80% 189.11% 189.37% 191.51% 196.23% 203.98%Total liabilities and equity 301.20% 295.55% 283.61% 403.24% 362.84% 341.36% 334.11% 327.72% 311.40% 311.99% 308.32%

VisaValue Driver Estimation

Fiscal Years Ending Sept. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023EKey assumptions:

Marginal tax rate 31% 33% 33% 33% 33% 33% 33% 33% 33% 33% 33%WACC 7.58% 7.58% 7.63% 7.13% 7.13% 7.15% 7.16% 7.16% 7.19% 7.20% 7.22%Normal Cash (% of sales)  7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%Cost of Debt 3.89% 3.89% 3.89% 3.89% 3.89% 3.89% 3.89% 3.89% 3.89% 3.89% 3.89%

NOPLAT ComputationOperating revenues Service revenues 5352 5797 6302 7040 7931 8779 9603 10442 11355 12254 13056Data processing revenues 4642 5167 5552 6160 6892 7570 8235 8954 9641 10280 10853International transaction fees 3389 3560 4064 4329 5210 5549 5959 6362 6792 7197 7453Other revenues 716 770 823 853 885 917 951 986 1022 1059 1098Client incentives (2321) (2592) (2861) (3125) (3556) (3878) (4207) (4546) (4898) (5234) (5518)

Total operating revenues 11778 12702 13880 15258 17361 18936 20541 22197 23912 25556 26941

Operating expenses Personnel expenses 1932 1875 2079 2136 2430 2651 2875 3107 3347 3577 3771Marketing 876 900 872 916 1042 1136 1233 1332 1435 1533 1617Network & processing 468 507 474 534 607 662 718 776 836 894 942Professional fees 412 328 336 382 434 474 514 556 598 640 674Depreciation & amortization 397 435 494 472 660 750 819 888 959 1034 1105General & administrative expenses 451 507 547 534 607 663 719 777 837 894 943

Total operating expenses  4536 4552 4802 4972 5781 6336 6877 7435 8013 8572 9052Implied interest on op. leases 11.93 12.22 11.78 13.27 18.54 21.10 23.01 24.96 26.98 29.06 31.06EBITA 7254 8162 9090 10298 11599 12621 13686 14787 15926 17013 17921

Income tax provision  2277 2286 2667 3226 3653 3990 4359 4721 5096 5486 5785Tax shield on non‐operating income (expense) 6 9 (23) 0  0  0  0  0  0  0  0 Tax shield on interest expense 0 0 0 165  165  165  147  147  147  116  116 Tax shield on implied interest 3.70 4.03 3.89 4.38 6.12 6.96 7.59 8.24 8.90 9.59 10.25Adjusted Taxes 2275 2281 2694 3395 3824 4162 4513 4876 5252 5611 5910

Change in deferred taxes 1527 (580) 195 (35) 0  0  0  0  0  0  0 

NOPLAT: EBITA ‐ Adjusted Taxes + Change in DT 6506 5301 6591 6868 7775 8460 9173 9911 10674 11402 12011

Invested Capital Computation:Normal cash 824 889 972 1068 1215 1326 1438 1554 1674 1789 1886Accounts receivable, net  761 822 847 2594 2951 3219 3492 3774 4065 4345 4580Settlement receivable  799 786 408 915 1042 1136 1232 1332 1435 1533 1616Customer collateral  866 961 1023 1153 1313 1432 1553 1678 1808 1932 2037Current portion of client incentives  282 210 303 343 391 426 462 499 538 575 606Prepaid expenses & other current assets 329 307 353 413 470 513 557 602 648 693 730Operating Current Assets 3861 3975 3906 6487 7382 8052 8734 9438 10167 10866 11456

Accounts payable 184 147 127 2289 2604 2840 3081 3330 3587 3833 4041Settlement payable  1225 1332 780 1373 1563 1704 1849 1998 2152 2300 2425Customer collateral  866 961 1023 1153 1313 1432 1553 1678 1808 1932 2037Accrued compensation and benefits  523 450 503 618 703 767 832 899 968 1035 1091Client incentives ‐ ST 919 1036 1049 1137 1293 1411 1530 1654 1781 1904 2007Accrued liabilities  613 624 868 676 769 839 910 983 1059 1132 1194Operating Current Liabilities 4330 4550 4350 7246 8245 8993 9755 10541 11356 12137 12794

Net Operating WC ‐469 ‐575 ‐444 ‐758 ‐863 ‐941 ‐1021 ‐1103 ‐1188 ‐1270 ‐1339

PP&E, net 1732 1892 1888 2638 3002 3274 3552 3838 4134 4419 4658PV of operating leases 314 303 341 476 542 591 641 693 747 798 841

Client incentives ‐ LT 89 81 110 111 127 138 150 162 175 187 197Total other assets 521 855 776 0 0 0 0 0 0 0 0Intangible assets  11351 11411 11361 11481 11481 11481 11481 11481 11481 11481 11481Other LT operating assets 11961 12347 12247 11592 11608 11619 11631 11643 11656 11668 11678

Total other liabilities  602 1005 897 1222 1391 1517 1645 1778 1915 2047 2158Other LT operating liabilities  602 1005 897 1222 1391 1517 1645 1778 1915 2047 2158

Invested Capital 12936 12962 13135 12726 12898 13027 13158 13293 13433 13567 13680

ROIC  51% 41% 51% 52% 61% 66% 70% 75% 80% 85% 89%Ending NOPLAT  6506 5301 6591 6868 7775 8460 9173 9911 10674 11402 12011Beg. Invested Capital  12870 12936 12962 13135 12726 12898 13027 13158 13293 13433 13567Ending NOPLAT/Beg. Invested Capital  51% 41% 51% 52% 61% 66% 70% 75% 80% 85% 89%

EP 5530 4321 5602 5931 6867 7537 8241 8968 9719 10435 11031Beg. Invested Capital  12870 12936 12962 13135 12726 12898 13027 13158 13293 13433 13567ROIC  51% 41% 51% 52% 61% 66% 70% 75% 80% 85% 89%WACC 8% 8% 8% 7% 7% 7% 7% 7% 7% 7% 7%Beg. Invested Capital*(ROIC ‐ WACC) 5530 4321 5602 5931 6867 7537 8241 8968 9719 10435 11031

FCF 6439 5276 6418 7276 7603 8331 9042 9775 10534 11268 11897Ending NOPLAT 6506 5301 6591 6868 7775 8460 9173 9911 10674 11402 12011Beg. Invested Capital 12870 12936 12962 13135 12726 12898 13027 13158 13293 13433 13567Ending Invested Capital  12936 12962 13135 12726 12898 13027 13158 13293 13433 13567 13680Ending NOPLAT ‐ (Ending Invested Capital ‐ Beg. InvestedCapital)

6439 5276 6418 7276 7603 8331 9042 9775 10534 11268 11897

VisaCapital Structure

Coupon Maturity Rating Price Yield Size Outstanding (in millions) Bond MV (in millions) Op. Lease PV (in millions) MV Debt (in millions) MV Equity (in millions) Total MV (in millions) Debt % Equity %1.200 2017 A+ 100.3 1.028% 17.5 17552.200 2020 A+ 101.793 1.799% 30 30542.800 2022 A+ 102.588 2.374% 22.5 23083.150 2025 A+ 103.303 2.753% 40 41324.150 2035 A+ 105.982 3.712% 15 15904.300 2045 A+ 106.885 3.892% 35 3741

$16,580 $341 $16,921 $137,458 $171,300 9.88% 90.12%

Debt % Equity % 2016E 9.88% 90.12%2017E 9.91% 90.09%2018E 8.89% 91.11%2019E 8.92% 91.08%2020E 8.95% 91.05%2021E 7.18% 92.82%2022E 7.21% 92.79%2023E 5.88% 94.12%

Note: I decreased the MV debt % by using the bond repayment schedule of as a proxy, also accounting for projected PV of operating leases.

VisaWeighted Average Cost of Capital (WACC) Estimation

Weekly Beta (Bloomberg) 1 yr.  0.9172 yr.  1.0183 yr.  1.0604 yr. 1.0155 yr.  1.01510 yr.  0.916

Cost of equity  7.63%Risk Free Rate  2.63%Beta 1.00Market Risk Premium  5%

Cost of debt 3.89%

Marginal Tax Rate 33%

2016E Firm Value Equity MV $137,458Debt MV $16,921Total MV $154,379

Est. Capital Structure  2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023EEquity %  90.12% 90.09% 91.11% 91.08% 91.05% 92.82% 92.79% 94.12%Debt % 9.88% 9.91% 8.89% 8.92% 8.95% 7.18% 7.21% 5.88%

Implied Constant WACC  2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E7.13% 7.13% 7.15% 7.16% 7.16% 7.19% 7.20% 7.22%

VisaDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:     CV Growth 3.20%     CV ROIC 88.53%     WACC 7.13% 7.13% 7.15% 7.16% 7.16% 7.19% 7.20% 7.22%     Cost of Equity 7.63% 7.63% 7.63% 7.63% 7.63% 7.63% 7.63% 7.63%

Fiscal Years Ending Sept. 30 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E1 2 3 4 5 6 7 8

DCF ModelNOPLAT  6868 7775 8460 9173 9911 10674 11402 12011Beg. IC 13135 12726 12898 13027 13158 13293 13433 13567End IC  12726 12898 13027 13158 13293 13433 13567 13680Change in IC (408) 172  129  131  135  140  134  113 ROIC 52% 61% 66% 70% 75% 80% 85% 89%

FCF 7276 7603 8331 9042 9775 10534 11268 11897CV 287886PV of FCF 6792 6625 6772 6858 6917 6946 6924 176708

Value of Operating Assets 224542Excess Cash 2546Restricted cash ‐ litigation escrow  1072Pension surplus 17Investment securities ST 2497Investment securities LT 3384Bond MV (16580)Accrued litigation  (1024)PV of Operating Leases  (341)PV of ESOP (1207)Value of Equity  21490779.67% Class A Allocation  171216Class A Shares Outstanding 1946

Price (09/30/15) $87.96Price today  $90.54

EP ModelNOPLAT  6868 7775 8460 9173 9911 10674 11402 12011Beg. IC 13135 12726 12898 13027 13158 13293 13433 13567End IC  12726 12898 13027 13158 13293 13433 13567 13680ROIC 52% 61% 66% 70% 75% 80% 85% 89%

EP 5931 6867 7537 8241 8968 9719 10435 11031CV 274319PV of EP  5536 5983 6127 6250 6346 6408 6412 168381

Sum PV of EP 211443Beg. IC 13135Value of Operating Assets 224578Excess Cash 2546Restricted cash ‐ litigation escrow  1072Pension surplus 17Investment securities ST 2497Investment securities LT 3384Bond MV (16580)Accrued litigation  (1024)PV of Operating Leases  (341)PV of ESOP (1207)Value of Equity  21494379.67% Class A Allocation  171245Class A Shares Outstanding 1946

Price (09/30/15) $87.98Price today  $90.56

VisaDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Sept. 30 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E1 2 3 4 5 6 7 8

EPS $2.75 $3.19 $3.56 $3.98 $4.41 $4.88 $5.36 $5.77

Key Assumptions   CV growth 3.75%   CV ROE 22.35%   Cost of Equity 7.63%

Future Cash Flows     P/E Multiple (CV Year) 21.45     EPS (CV Year) $5.77     Future Stock Price $123.82     Dividends Per Share     Future Cash Flows $0.56 $0.72 $0.80 $0.90 $1.10 $1.22 $1.34 $1.44

     Discounted Cash Flows $0.52 $0.62 $0.64 $0.67 $0.76 $0.78 $0.80 $74.00

Intrinsic Value (9/30/2015) $78.28Price Today $80.58

VisaRelative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2016E 2017E P/E 16 P/E 17 EPS gr. PEG 16 PEG 17MA Master Card $86.85 $3.53  $4.14  24.6        21.0        15.54 1.58        1.35       GPN Global Payments Inc. $58.93 $3.04  $3.29  19.4        17.9        12.00 1.62        1.49       FISV Fiserv, Inc. $95.83 $4.39  $4.94  21.8        19.4        12.48 1.75        1.55       JKHY Jack Henry & Assoc.  $80.99 $2.83  $3.09  28.6        26.2        11.50 2.49        2.28       PYPL PayPal $38.16 $1.49  $1.76  25.6        21.7        18.77 1.36        1.16       

Average 24.0       21.2       1.8          1.6         Source: Yahoo! Finance

V Visa $70.62 $2.75  $3.19  25.7        22.1                 11.3  2.3          2.0         

Implied Value:   Relative P/E (EPS16) $    66.04    Relative P/E (EPS17) 67.77$      PEG Ratio (EPS16) 54.90$      PEG Ratio (EPS17) 56.68$   

VisaSensitivity Analysis

CV Growth NOPLAT 2017E Global Non-Cash Transaction Growth$90.54 1.00% 2.00% 3.20% 4.00% 5.00% $90.54 -5% 5% 15% 25% 35%50% $65.04 $73.22 $88.42 $104.83 $141.99 45% $84.38 $86.73 $89.08 $91.43 $93.7860% $65.21 $73.62 $89.24 $106.12 $144.32 2017E 55% $84.12 $86.99 $89.86 $92.74 $95.61

CV ROIC 70% $65.33 $73.90 $89.83 $107.04 $145.98 Market 64% $83.89 $87.23 $90.54 $93.91 $97.2580% $65.41 $74.12 $90.27 $107.73 $147.23 Share 75% $83.60 $87.52 $91.43 $95.34 $99.2689% $65.47 $74.26 $90.54 $108.19 $148.07 85% $83.34 $87.78 $92.21 $96.65 $101.09

100% $65.54 $74.41 $90.89 $108.69 $148.98

Beta 2017E Processed Transaction Growth $90.54 0.90 0.95 1.00 1.06 1.08 $90.54 -4% 4% 12% 20% 28%1.00% $71.22 $68.24 $65.47 $62.42 $61.46 -5.00% $78.06 $80.24 $82.43 $84.61 $86.792.00% $81.97 $77.94 $74.26 $70.25 $69.00 2017E 2.50% $81.98 $84.16 $86.34 $88.52 $90.71

CV Growth 3.20% $102.84 $96.33 $90.54 $84.46 $82.60 Payments 10.60% $86.20 $88.39 $90.54 $92.75 $94.93NOPLAT 4.00% $126.82 $116.79 $108.19 $99.36 $96.72 Vol. Growth 18.00% $90.07 $92.25 $94.43 $96.61 $98.80

5.00% $187.40 $165.48 $148.07 $131.41 $126.64 25.00% $93.72 $95.90 $98.09 $100.27 $102.45

Risk Premium 2017E Service Rev. YOY Growth$90.54 4.00% 4.50% 5.00% 5.50% 6.00% $90.54 -10.00% 0.00% 12.65% 20.00% 30.00%1.00% $77.97 $71.22 $65.47 $60.52 $56.21 -10.00% $77.25 $80.50 $84.61 $86.99 $90.242.00% $91.34 $81.97 $74.26 $67.79 $62.30 2017E Data 0.00% $79.98 $83.23 $87.34 $89.73 $92.97

CV Growth 3.20% $118.74 $102.84 $90.54 $80.81 $72.87 Processing Rev. 11.89% $83.23 $86.48 $90.54 $92.97 $96.22NOPLAT 4.00% $152.86 $126.82 $108.19 $94.21 $83.32 YOY Growth 20.00% $85.45 $88.69 $92.80 $95.19 $98.43

5.00% $254.34 $187.40 $148.07 $122.20 $103.88 30.00% $88.18 $91.42 $95.53 $97.92 $101.17

Risk Premium 2022E EBITA$90.54 4.00% 4.50% 5.00% 5.50% 6.00% $90.54 5000 10000 17013 20000 25000

0.90 $135.29 $116.94 $102.84 $91.67 $82.60 3500 $84.50 $85.79 $87.61 $88.38 $89.680.95 $126.49 $109.46 $96.33 $85.92 $77.45 2017E EBITA 7500 $85.97 $87.26 $89.08 $89.85 $91.15

Beta 1.00 $118.74 $102.84 $90.54 $80.81 $72.87 11599 $87.47 $88.77 $90.54 $91.36 $92.651.06 $110.56 $95.85 $84.46 $75.40 $68.00 15500 $88.91 $90.20 $92.02 $92.79 $94.091.08 $108.07 $93.71 $82.60 $73.74 $66.52 19500 $90.38 $91.67 $93.49 $94.26 $95.56

Risk Premium 2023E EBITA$90.54 4.00% 4.50% 5.00% 5.50% 6.00% $90.54 14000 16000 17921 20000 22000

50% $115.79 $100.34 $88.42 $78.93 $71.21 5000 $64.18 $76.59 $88.50 $101.39 $113.8060% $116.92 $101.30 $89.24 $79.65 $71.84 2016E EBITA 7500 $65.17 $77.57 $89.48 $102.38 $114.78

CV ROIC 70% $117.73 $101.98 $89.83 $80.17 $72.30 10298 $66.27 $78.67 $90.54 $103.48 $115.8880% $118.33 $102.49 $90.27 $80.55 $72.64 12500 $67.14 $79.54 $91.45 $104.34 $116.7589% $118.74 $102.84 $90.54 $80.81 $72.87 15000 $68.12 $80.52 $92.44 $105.33 $117.73

100% $119.18 $103.21 $90.89 $81.09 $73.11

Beta 2023E Rev.$90.54 0.90 0.95 1.00 1.06 1.08 $90.54 23000 25000 26941 29000 31000

50% $100.34 $94.02 $88.42 $82.48 $80.67 10000 $64.08 $76.49 $88.53 $101.29 $113.7060% $101.30 $94.91 $89.24 $83.24 $81.41 2016E Rev. 13000 $65.26 $77.66 $89.70 $102.47 $114.87

CV ROIC 70% $101.98 $95.54 $89.83 $83.78 $81.94 15258 $66.14 $78.55 $90.54 $103.35 $115.7580% $102.49 $96.01 $90.27 $84.19 $82.33 18000 $67.22 $79.62 $91.66 $104.43 $116.8389% $102.84 $96.33 $90.54 $84.46 $82.60 21000 $68.39 $80.79 $92.83 $105.60 $118.00

100% $103.21 $96.68 $90.89 $84.76 $82.89

VisaKey Management Ratios

Fiscal Years Ending Sept. 30 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Liquidity RatiosQuick Ratio  1.34 0.93 1.35 0.90 0.88 0.93 1.18 1.40 1.40 1.67 1.80(cash+trading and AFS securities+settlements receivable+AR/current liabilities)

Current Ratio  1.69 1.42 1.86 1.26 1.23 1.27 1.52 1.74 1.73 2.00 2.12(current assets/current liabilities)

Activity or Asset‐Management RatiosSettlements receivable t/o  18.80 16.03 23.25 23.06 17.74 17.39 17.34 17.31 17.29 17.22 17.11(op. rev/avg. settlement rec.)

AR t/o  15.87 16.05 16.63 8.87 6.26 6.14 6.12 6.11 6.10 6.08 6.04(op. rev/avg. AR)

Financial Leverage RatiosDebt‐to‐Equity Ratio  N/A N/A N/A 48.20% 47.77% 39.51% 36.37% 33.61% 24.30% 22.19% 16.15%(BV debt/BV equity)

Interest Coverage Ratio  N/A N/A N/A 20.55 23.14 25.18 30.68 33.15 35.71 48.43 51.01(op. income/int. exp.)

Profitability RatiosROA  13.56% 14.90% 16.46% 12.98% 11.91% 12.69% 13.28% 13.56% 14.06% 14.45% 14.43%(NI/avg. BV assets)

ROE  18.28% 20.04% 22.10% 20.86% 22.42% 23.48% 23.73% 23.70% 23.56% 23.22% 22.35%(NI/avg. BV equity)

Payout Policy RatiosDividend payout  17.35% 18.50% 18.60% 20.36% 22.50% 22.50% 22.50% 25.00% 25.00% 25.00% 25.00%Class A earnings payout  79.36% 79.16% 79.67% 80.00% 80.00% 80.00% 80.00% 80.00% 80.00% 80.00% 80.00%