Title: Should You Invest in This Buffett-Backed Stock Now?
Berkshire Hathaway's extensive public equities portfolio features heavy-hitters like Apple, Coca-Cola, and Chevron. Yet, Buffett also has a soft spot for financial services companies. One unassuming gem in his portfolio, held since 2011, might pique your interest: is this Warren Buffett stock a worthwhile buy right now?
Monumental Gains
While Bank of America and American Express grab headlines, Mastercard (MA, -0.10%) tends to fly under the radar as a top Buffett stock in the financial sector. This global card payment titan boasts an impressive market cap of $482 billion, largely thanks to stellar shareholder gains since its 2006 IPO. A $1,000 investment back then would now be worth an astounding $126,000.
Distinctive Qualities
Buffett has a penchant for owning high-quality businesses for as long as possible. Viewed from this perspective, Mastercard is a shining example of an exceptional company.
First off, the business has exhibited consistent growth, driven by the global shift from cash and paper-based transactions to digital and card-based transactions. This lasting trend has boosted revenue from $2.2 billion in Q3 2014 to nearly $7.4 billion in the latest quarter.
This revenue growth is powered by two primary factors: rising transaction volumes and an increasingly extensive card network. Today, Mastercard trails only Visa in U.S. payment volume.
Mastercard is incredibly profitable, with a stellar five-year operating margin of 56.1%. Meanwhile, the firm generates over $9.9 billion in cash from operations annually, which it uses to pay dividends and repurchase shares. Buffett and his team surely appreciate such financial discipline.
Companies with a durable competitive advantage, or an "economic moat," possess the power to protect their industry positions. Mastercard benefits from potent network effects, as its massive 3.1 billion-card base and 130 million merchant locations create significant value for both new and existing stakeholders.
Beyond network effects, Mastercard also boasts some protection against disruption. New fintech platforms and cryptocurrencies have had minimal impact on the company's growth due to its deep-rooted presence in the economy.
Although card networks often find themselves under regulatory scrutiny due to their prominent positions and profits, this is a testament to their success. It seems that Buffett's investment has benefited thus far from this balanced regulatory environment.
Valuation Analysis
Mastercard is an alluring investment due to its quality as a business. However, investors must also consider its valuation, as the purchasing price significantly impacts potential returns.
At the moment, shares of Mastercard trade at a price-to-earnings ratio (P/E) of 40, which is slightly more expensive than its trailing-10-year average. But it's not difficult to argue that the high valuation is justified by the company's favorable qualities.
Investors might also consider exercising patience, waiting for any price dips to make a purchase.
Sources:
- [1] Seaport Global Securities (2024): Mastercard: Neutral, No Price Target
- [2] Q3 2024 Earnings release, Mastercard (2024)
- [3] Mastercard Investor Relations Q2 2024 Earnings Presentation (2024)
- [4] Mackenzie Investments, Mastercard (2024)
- [5] TD Cowen (2024): Mastercard: Buy, Price Target Increased to $599.
Investing in Mastercard could be a wise decision for those interested in financial stocks, given Buffett's long-term hold in the company. Since its 2006 IPO, a $1,000 investment in Mastercard would have yielded an astonishing return of $126,000.
Mastercard's stellar financial performance, driven by consistent growth, high profitability, and a durable competitive advantage, makes it an attractive investment opportunity. The company's global presence, strong network effects, and ability to navigate regulatory scrutiny contribute to its long-term potential.
