MasterCard: A Classic Buffett Play

Jun.17.11 | About: MasterCard Incorporated (MA)

MasterCard (NYSE:MA) is one of those companies everyone knows about, particularly after their famous ad campaign, "... for everything else there is MasterCard." I see their ads everywhere, but for some reason, never thought about investing money in MasterCard. Then, the other week, I read that Warren Buffettt had initiated a stake in the company, so I decided to delve into their financials to see if I could see what he saw that was attractive. What I realized was that MasterCard is an international growth story with solid fundamentals. It also has many of the characteristics of a Buffett investment:

  1. Growth
  2. Moat
  3. Strong Brand/Franchise
  4. Theme/trend
  5. Strong Fundamentals
  6. Good company at a fair price.

I am not going to detail MasterCard’s business, because most people know what they do. If you want more information operations, just check out their website. This article is going to highlight the areas above.

Growth

If you are Warren Buffett and managing the amount of money he is, in order to invest a dollar today and have it become two dollars in the future, you need to invest in big growing companies. If you read through the financials of MasterCard, you will see that despite its size, MasterCard is an international growth story.

Take a look at the charts showing GDV since 2007, taken from MasterCard’s 10K reports. Note: GDV stands for Gross Dollar Volume. According to MasterCard, "GDV represents the aggregate dollar amount of purchases made and cash disbursements obtained with MasterCard-branded cards and includes the impact of balance transfers and convenience checks." Essentially, GDV is the gross amount of transactions processed around the world by Mastercard.

2007
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2008
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2009
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2010
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With the exception of 2009, due to the economic downturn, the international growth has been blistering, and I do not anticipate a change in this trend either, although U.S. sales do seem to have leveled. The astounding part of this is that 60% of the GDV in 2010 is internationally driven. Safe and secure international growth is what Buffett is after and it looks like he found it.

Lastly, check out the earnings estimates below (from moneycentral.com). Not too shabby.

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Moat

Not only did Buffett find international growth with MasterCard, he is also getting a nice little moat. It is difficult to imagine any company knocking MasterCard, Visa (NYSE:V), or Amex (NYSE:AMX) off their game. From here on out, it is a market share play and the market overseas is huge. Although there is regulatory risk with these companies, it is difficult to imagine life without them and their services. What would you do without a credit or debit card? Cash? Checks? No thanks.

Strong Brand/Franchise

Buffett is famous for finding good deals on large companies with strong brands/franchises. I think this is mainly because Buffett sees value in a brand due to the fact that accounting standards do not generally allow companies to value their brands on their balance sheets, because advertising and marketing costs are treated as expenses. Therefore, assets are understated on the books of companies with the best and most recognizable brands in the world. Buffett knows that strong brands drive sales and not just for years, but decades and lifetimes. If it is an internationally known brand, even better! MasterCard has a strong brand and a trusted brand. It is globally known.

Theme/trend

Buffett tends to be a theme based investor, carefully studying trends. There are two trends that Buffett is harnessing with MasterCard. One is international growth and development. The other is a move to a global society with less cash. If you read the latest annual reports, there is no doubt that MasterCard is positioning itself for this trend. The other brilliant thing about Buffett is that he uses big picture logic to reduce uncertainty and extrapolate outcomes. Think about it, if the trend is to go cashless, there are only a handful of companies that can make this happen. Even if the trend does play out as quickly as he thinks, he still purchased a great company at a good price and he just has to wait. If you are investing in chip technology companies, anything can happen. The outcome with MasterCard is relatively more certain. This makes MasterCard a safer investment especially considering that MasterCard is not as expensive as many of the stocks whose future growth is much more uncertain. Visa, MasterCard, Amex are going to facilitate the international growth and cashless trends and will make all the money.

Fundamentals

MasterCard has impressive fundamentals that meet the Buffett standards when it comes to returns, efficiency, etc. Below are charts taken from moneycentral.com.

Returns

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Management Efficiency

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I am mainly focused on returns on equity and returns on assets. In my mind, these two items are the biggest determining factor as to whether a company has a moat and good management that can benefit shareholders.

Good Company at a Fair Price

Since Wall Street is obsessed with trading, this often creates really great opportunities for long term investors. I believe this is the case with MasterCard. There is regulatory uncertainty as a result of fees such as interchange fees that could impact MasterCard’s business. As a result, Buffett was able to buy shares in a good company at a fair price. I am somewhat nervous over the regulatory issues myself, but at the end of the day, deals are usually struck by politicians and lobbyists do what they do, and an agreement is usually worked out.

In conclusion, I am considering purchasing MasterCard stock to add to my portfolio of relatively safe investments with good growth potential. I feel the stock could fluctuate a bit, but overall, it is a safe enough investment. When I die someday, chances are pretty good that MasterCard will not only still be in business, but be MUCH bigger and more valuable than it is now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.