Swipe Left On Visa Stock, Pick These Alternatives?

If you are a Visa (NYSE:V) investor and have benefited from the stock’s steady rise over the last several years, it may be time to look elsewhere. As of this moment, we find Western Midstream Partners (NYSE:WES) – an energy company focused on gathering, processing, and transporting natural gas, crude oil, and other hydrocarbons – and Encompass Health (NYSE:EHC) – a healthcare company specializing in post-acute care – to be more attractive buys than Visa.

Why? Simply because the valuation and growth numbers tell us so. Western Midstream Partners and Encompass Health stocks have both seen higher growth in revenue and operating profits than Visa in the last twelve months, as well as the most recent quarter. Not only that, they’re both cheaper than Visa.

In fact, the strategy of thoughtfully shifting allocation to more attractive stocks is part of our market outperforming Trefis High Quality Portfolio (HQ) – which beat the S&P 500 in 2023 handily despite being meaningfully underweight the magnificent 7. Full HQ performance story here.

Better Buys Than V – WES & EHC Stocks?

Specifically, to illustrate the opportunity for Western Midstream Partners, you pay $9.67 per dollar of earnings-before-interest-and taxes (EBIT) for WES stock versus $19.32 for V, and get higher annual growth (11.0% vs 9.7%), higher quarterly growth (23% vs 9.6%), and better margin trend (3.8% vs -0.09%). Overall, you get higher revenue, and operating profit growth from Western Midstream Partners and Encompass Health, and pay less than V stock. See our complete dashboard analysis of Better Bets Than V Stock 

So What’s The Catch?

Now, could Visa buck the trend? Could it grow its revenues and profits much faster than Western Midstream Partners or Encompass Health in the coming quarters? Of course that’s possible. Visa has been impacted by multiple issues, including a slowing economy and concerns about Visa having to reduce the fees it charges businesses following regulatory setbacks. That being said there are positives as well. Visa has been able to expand its transaction volumes as credit card and digital payments are growing in favor of cash payments in most markets. Moreover, Visa’s massive cash generation is helping the company with its stock buybacks – driving growth in its EPS.

The data below shows both Western Midstream Partners and Encompass Health outperformed Visa recently and over the last year. They might repeat this. Related Ideas: Better Buys and Outperformers

Pay Less Per Dollar Of Profit (EBIT) Than Visa, To Get More Revenue And Profit Growth?

WES has seen the strongest revenue growth of the three in the last twelve months and the last quarter, followed by EHC. V has seen the slowest growth over the period. Moreover, WES and EHC have seen higher margin expansion compared to V. However, despite this, V stock trades at a higher price-to-operating income ratio of almost 19.3x, compared to levels of roughly 10x for WES and 12x for EHC.

What About Relative Market Returns?

EHC stock has shown a stronger market performance, with returns of 22% over the past 6 months, and 33% over the past 12 months. In comparison, V returns for the same periods were weaker at 0.5% and 15%, respectively.

How Did These Metrics Look 1 Year Ago – Could V’s Combination Of Higher Valuation & Lower Growth Persist?

V still had a higher valuation of $18.44 vs $8.44 for WES but higher annual growth (13.35% vs -0.9%), higher quarterly growth (11.66% vs -15.76%), and more favorable margin change (-0.3% vs -3.1%). The situation looks quite different now which means that market reward could switch in favor of WES and EHC.

Investment Thesis For WES and EHC

Western Midstream Partners operates primarily in the Permian Basin, which is one of the most prolific oil and gas regions in the U.S. The company generates steady cash flows via long-term contracts. Moreover, the company also stands to benefit indirectly from higher electricity demand from tech trends such as electric vehicles and artificial intelligence, given that natural gas – which is transported using the company’s pipelines – is playing a growing role in the U.S. power generation mix. The stock’s risk-to-reward ratio could be attractive, given its sizable yield (over 8%) and upside potential.

Encompass Health is a leader in the post-acute care space focusing on inpatient rehabilitation and home health services for patients with stroke, brain injury, hip fracture, and other complex neurological and orthopedic conditions. The company’s business stands to benefit from an aging U.S. population as well as increasing demand for specialized recovery services. The company’s steady growth, reasonably strong financial position, and fair valuation could make the stock attractive for investors.

Here’s more on Trefis’ market-beating portfolios, including HQ with downside protection.

[1] Returns as of 9/5/2024
[2] Cumulative total returns since the end of 2016

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