What: Shares of payment processing facilitator MasterCard (NYSE:MA) shot higher by 10% in February, according to data from S&P Capital IQ, after investors learned that one of the world's most respected investors had purchased some of its shares, and following the announcement that a key rival had lost a major account.
So what: We recently learned that Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) had taken a small position in both Visa and MasterCard. Based on the latest 13-F filing, Berkshire Hathaway owned just shy of 5.4 million shares of Mastercard, or nearly 0.5% of its outstanding shares as of Dec. 31, 2014. Buffett is known for buying businesses designed to stand the test of time, so an endorsement from Buffett is invaluable. Additionally, if Buffett buys it, there's a chance investors who follow his every move may buy it as well.
The other factor working in favor of MasterCard is the unfortunate loss of Costco Wholesale (NASDAQ:COST) as a partner for American Express (NYSE:AXP). Costco accounted for a notable chunk of AmEx's business, and a partnership with Costco up for grabs could mean a windfall of opportunity for MasterCard or one of the other payment processing facilitators.
Now what: Personally, I find a lot to like about MasterCard, but I'm not oblivious to the fact that it does have headwinds. Increasing payment processing competition in developed markets and the potential for increasing banking regulations could wind up slowing growth for MasterCard or its peers.
But, those headwinds seem pretty minor compared to its growth potential. According to commentary from MasterCard's CFO, 85% of transactions globally are still conducted in cash, leaving MasterCard a multi-decade double-digit growth opportunity.
Another key point is that MasterCard's merchant network is gigantic, and the barrier to entry as a payment processing facilitator is large. This implies that MasterCard has pretty significant pricing power with its merchants, and also that its brand is well-recognized in the markets it operates. This isn't to say it won't have to spend on infrastructure to expand into new territories, but MasterCard appears well situated to grow over the long run.
Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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