MasterCard Is Tier 1http://www.fool.com/investing/general/2013/07/02/mastercard-is-tier-1.aspx Joe Tenebruso
July 2, 2013
"And, by the way, the bulk of the billions in Berkshire Hathaway has come from the better businesses. ... And most of the other people who've made a lot of money have done so in high-quality businesses." -- Charlie Munger
At Tier 1 Investments, a Motley Fool Real-Money Portfolio, I seek out and invest in elite businesses. These include companies with the strongest competitive advantages, greatest growth opportunities, and best management. I call these businesses Tier 1 enterprises, and MasterCard (NYSE: MA) fits that description perfectly.
A wide moat
As a financial services company, having a respected and trusted brand is of paramount importance. MasterCard has been able to build such a brand thanks in part to the fantastic success of its nearly two-decade-old "Priceless" advertising campaign, and has strengthened its brand image by earning a reputation for the reliability and security of its payment processing platform.
MasterCard also enjoys powerful network effects, as each new merchant that accepts MasterCard makes the network more valuable to consumers, and each new consumer who carries MasterCard increases the potential pool of customers for participating merchants (thanks to an easier means of purchase and therefore likelihood of sale).
MasterCard earns a small fee from every transaction that passes through its payment network, and its tollbooth business model produces steady, fast-growing cash flow. It also helps MasterCard earn extremely impressive operating margins (53.5% in 2012) and returns on capital (38.5%). Those are some of the highest I've seen among all the companies I follow, and they are strong signs of competitive advantage.
The numbers tell the story
From these numbers you can get a sense of the tremendous scale that this business already enjoys. But the most important number, and what's most exciting to me, is the number 85. That's the percentage of global transactions that are still made via cash or check. Thus, MasterCard is an already dominant business, but it still has tremendous room for growth as the world continues to move away from cash and toward electronic payments. And few companies are as well positioned to benefit from this trend as MasterCard.
MasterCard is also not immune to global economic slowdowns. A pullback in consumer spending would hurt the company's transaction revenue. But markets operate in cycles, and a downturn of this nature would ordinarily be followed by an economic recovery. So I will likely view these types of pullbacks as opportunities to add to Tier 1's position in MasterCard, rather than a reason to sell.
Finally, and possibly most importantly, onerous regulation is an ever-present risk facing MasterCard. U.S. legislators have made it clear that they're willing to step in and actually cap MasterCard's and other credit card companies' debit fees when they feel that it's in the best interest of merchants and consumers -- as demonstrated by The Dodd-Frank Act -- and it's possible that regulators in other countries will take similar action in the future. In addition to the threat of increased regulation is the threat of litigation, as MasterCard is facing multiple lawsuits with the potential for billion-dollar settlements. Unfavorable rulings could have serious negative effects on MasterCard's stock price, but the fear associated with these non-certain outcomes is also a likely reason we can buy MasterCard's shares at such an attractive price today.