This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Berkshire Hathaway owns dozens of businesses in its public equities portfolio, with well-known names like Apple, Coca-Cola, and Chevron commanding sizable allocations.
But the Oracle of Omaha also likes to own financial services companies. There's one in particular, which the conglomerate has owned since 2011, that might fly under the radar. Is this Warren Buffett stock a smart buying opportunity right now?
Tremendous gains
Bank of America and American Express receive a lot of attention because they are two of the top Buffett stocks in the financial sector. However, investors can't forget about Mastercard (NYSE: MA), one of the leading global card payment businesses.
It has a massive market cap of $482 billion. This huge value has come from impressive shareholder gains. Since Mastercard's initial public offering in 2006, the company has generated a total return of 12,470%. This means that a $1,000 investment made back then would be worth $126,000 today.
Favourable attributes
Buffett's philosophy centres on owning high-quality businesses for as long as possible. Viewed in this light, there is no shortage of reasons to appreciate Mastercard as a wonderful company.
For starters, the business registers durable growth, thanks to the worldwide transition from cash and paper-based forms of payment to digital and card-based transactions. This ongoing secular trend has propelled revenue from $2.2 billion a decade ago in the third quarter of 2014 to $7.4 billion in the latest quarter.
That top-line growth has been driven by rising transaction dollars being processed and more cards in circulation. Today, the business is behind only Visa in the United States in total payment volume.
Mastercard is incredibly profitable, turning a significant portion of sales into earnings. In the past five years, the company's operating margin has averaged a superb 56.1%. And in the last nine months, the business raked in over $9.9 billion in cash flow from operations, using the proceeds to pay dividends and repurchase shares. The company's pristine financial condition is likely something that Buffett and his team hold in high regard.
Companies that possess an economic moat are able to defend their industry positions. Mastercard benefits from powerful network effects. Its card base of 3.1 billion, coupled with the 130 million or so merchant locations that accept Mastercard, make the entire platform extremely valuable to new and existing stakeholders as it gets bigger.
Besides network effects, another qualitative factor that investors can't ignore is that Mastercard is somewhat protected from the threat of disruption. The rise of fintech platforms and cryptocurrencies hasn't prevented the business from continuing to grow at a healthy pace because it is so entrenched in our economy.
Card networks seem to always be under scrutiny by regulators precisely because they have such dominant positions and generate outsize profits. But this points to just how successful these companies have become.
And with the new presidential administration leaning toward a more laid-back approach in terms of regulatory pressure, I'm not too concerned about Mastercard in this situation.
Mastercard's valuation
Mastercard is a great business in terms of quality. But before you rush to buy this Buffett stock, it's crucial to look at the valuation as well. Investors must make sure they aren't overpaying, no matter how wonderful a company is.
As of this writing, shares of Mastercard trade at a price-to-earnings ratio (P/E) of 40. That's more expensive than its trailing-10-year average. But it's not hard to argue that it deserves a premium valuation given the favorable traits discussed above.
However, investors might also lean toward practicing patience, waiting for any pullbacks to start buying shares. I believe this is the right move.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
