Amongst the varied dozens of holdings in Berkshire Hathaway‘s massive $365 billion stock portfolio, Visa and Mastercard are tiny positions. Combined, they make up lower than 1% of the conglomerate’s total assets.
But that doesn’t imply the payment technology corporations have been poor performers. It has been quite the selection situation, actually. The 2 financial stocks have soared over the past decade, crushing the S&P 500 index’s gain by wide margins.
There isn’t a question that Visa and Mastercard have each been phenomenal for his or her shareholders. But is there a greater Warren Buffett stock that investors should consider buying immediately?
Wonderful businesses
There isn’t a shortage of compelling reasons to know the 2 bank card payment giants. For starters, each Visa and Mastercard have historically posted a light revenue and earnings growth. Even in uncertain macroeconomic times, like what the world has been in for the past few years, these businesses proceed to report impressive financial results.
They’re each incredibly profitable. Within the midst of the last three months of 2023, Visa and Mastercard’s operating margins got here in at 69% and 52%, respectively. Such bottom-line strength allows them to pay dividends and buy back various stock.
I’d also point to their wide economic moats. As a consequence of their enormous two-sided payments platforms that merchants and consumers have heavily adopted globally, each corporations money in on powerful network effects. Consequently, their competitive positions are virtually unassailable.
It’s no wonder they each have made for implausible investments.
A top financial stock
It could be hard for anyone to query the concept Visa and Mastercard are truly great corporations. But some investors might balk at their above-average valuations. In the intervening time, shares of Visa and Mastercard trade at nearly 29 and 33 times forward earnings, respectively.
Meanwhile, take a peek at Berkshire Hathaway’s portfolio, and chances are high you’ll notice that one other large payments enterprise is a top holding: American Express (NYSE: AXP). And it ought to be in your radar.
Like Visa and Mastercard, Amex also operates a two-sided payments platform. Which suggests it, too, advantages from network effects. There are 80 million merchant locations in 200 countries that accept Amex as a way of payment. And as of Dec. 31, it had 141 million energetic cards in circulation that helped drive $434 billion of transaction volume throughout the last three months of 2023.
But unlike Visa and Mastercard, American Express may even be a card issuer. It finds and underwrites borrowers, takes on credit risk, handles ongoing payments, and offers perks and rewards to cardholders.
So, not only does Amex earn significant amounts of interest income, which represented 22% of total revenue (net of interest expense) in 2023, nonetheless the business collects what’s called discount revenue directly from merchants who plug into its network. Amex makes extra money from every transaction that runs across its system.
Because American Express typically targets a higher-income consumer, its default rates are lower than those of its banking peers. This points to the status of its well-known brand, and helps reduce its financial risk.
In Q4, the corporate reported revenue growth (net of interest expense) of 11% and diluted earnings per share growth of 27%. Management expects double-digit percentage gains again this 12 months.
As of this writing, its shares trade at a forward price-to-earnings ratio of 17.3. That could possibly be a inexpensive valuation than Visa and Mastercard. Nevertheless it’s justified because Amex operates more like a traditional bank.
Given the substantial stake Berkshire Hathaway holds in American Express (about 21%), Buffett and his investment team clearly view it because the best stock to own of those three. But I don’t see any problem with buying and holding all of them. They may all be long-term winners.
Do you’ve got to take a position $1,000 in American Express immediately?
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American Express is an promoting partner of The Ascent, a Motley Idiot company. Neil Patel has no position in any of the stocks mentioned. The Motley Idiot has positions in and recommends Berkshire Hathaway, Mastercard, and Visa. The Motley Idiot recommends the next options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Idiot has a disclosure policy.
Visa and Mastercard Are Phenomenal, but Is This a Higher Warren Buffett Stock to Buy Right Now? was originally published by The Motley Idiot