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13F - Mastercard


seshnath
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http://www.bloomberg.com/news/2011-05-16/berkshire-hathaway-inc-holdings-in-1st-quarter-13f-alert.html

 

Mastercard is a new addition.  Obviously it is a Combs pick.

 

http://www.bloomberg.com/news/2011-05-17/berkshire-takes-mastercard-stake-after-buffett-hires-money-manager-combs.html

 

The ultimate royalty on an ever increasing base (inflation is coming and somebody else's sales and almost no additional capital required to grow revenue) as WEB was saying recently.  Any other thoughts?

 

 

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I own V.  Think it's a little cheaper. 

 

There is a moat, tailwind of paper to electronic should continue for several years and they track inflation rather well.  For example, gas prices are up 33% YOY, in V's call, they talked about how the oil component purchases went from 8% to 10% (up 25% YOY).  Rather impressive. 

 

Zero debt, do about $70-$80MM in Capex, but there is huge operating leverage.  Moreover, the cash coming in goes towards repurchase of stock/dividends. 

 

I would buy MA if it was on sale.  Both should do well (think KO/PEP).  When I made the purchase, I thought about how Buffett looked at KO (it's been a long time, but at the time 11 out of 64 ounces of consumption was KO products)...in the States, the average person has 3 cards...I think I read that in India it's at .3

 

I took all my cards out of my wallet (debit, credit, and healthsavings) and all had a Visa logo.  They do every type of transaction: unemployment cards, gift, prepaid, employment checks.  The tranaction tollroad logic goes a long way.

 

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I own V.  Think it's a little cheaper. 

 

There is a moat, tailwind of paper to electronic should continue for several years and they track inflation rather well.  For example, gas prices are up 33% YOY, in V's call, they talked about how the oil component purchases went from 8% to 10% (up 25% YOY).  Rather impressive. 

 

Zero debt, do about $70-$80MM in Capex, but there is huge operating leverage.  Moreover, the cash coming in goes towards repurchase of stock/dividends. 

 

I would buy MA if it was on sale.  Both should do well (think KO/PEP).  When I made the purchase, I thought about how Buffett looked at KO (it's been a long time, but at the time 11 out of 64 ounces of consumption was KO products)...in the States, the average person has 3 cards...I think I read that in India it's at .3

 

I took all my cards out of my wallet (debit, credit, and healthsavings) and all had a Visa logo.  They do every type of transaction: unemployment cards, gift, prepaid, employment checks.  The tranaction tollroad logic goes a long way.

 

 

Great analysis, what did you do about regulatory risks?

 

BeerBaron

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I own V.  Think it's a little cheaper. 

 

There is a moat, tailwind of paper to electronic should continue for several years and they track inflation rather well.  For example, gas prices are up 33% YOY, in V's call, they talked about how the oil component purchases went from 8% to 10% (up 25% YOY).  Rather impressive. 

 

Zero debt, do about $70-$80MM in Capex, but there is huge operating leverage.  Moreover, the cash coming in goes towards repurchase of stock/dividends. 

 

I would buy MA if it was on sale.  Both should do well (think KO/PEP).  When I made the purchase, I thought about how Buffett looked at KO (it's been a long time, but at the time 11 out of 64 ounces of consumption was KO products)...in the States, the average person has 3 cards...I think I read that in India it's at .3

 

I took all my cards out of my wallet (debit, credit, and healthsavings) and all had a Visa logo.  They do every type of transaction: unemployment cards, gift, prepaid, employment checks.  The tranaction tollroad logic goes a long way.

 

 

Don't disagree with any of the analysis.  One thing strikes me, though - is there a consumer preference (taste difference) between V & MA?  If there is no real differentiation in the minds of the consumer, market lead can be eroded away.  I guess what I am asking is where/what is the size differential of the moat?

 

Besides, transaction volume increases are going to benefit both similarly - market share capture going forward and how they go about it may be what differentiates them.

 

Or, do you see a snowball effect here with V?  - sort of most people have V, therefore scale comes into play etc etc.

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I own Mastercard, looked at Visa but passed when during the IPO they broke off Visa Europe.  Most of Mastercard's growth is coming from Europe, Asia, and South America, Europe is a big volume driver, I wanted a piece of that.

 

MA is the ultimate money machine, it's part of a duopoly (sure AMEX and Discover exist, but puny marketshare), they have no credit risk they simply process payments.  The company is very asset light, some computers are required to expand their network, that's about it, so huge operating leverage.

 

As for current cheapness, ShaKherzi is probably right, V is a bit cheaper now.  I ended up getting MA at a few bucks over the IPO price and have held on for the wild ride, I've looked at V from time to time, but regulation in the US and the lack of Europe has held me back.  I might take a look again.

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Obviously the major risk with these guys is pricing regulation from governments. What is interesting to think about, however, is that for developing countries, the governments actually like increased penetration of electronic processing as it increases tax reporting substantially (or at least increases recoveries on audits from merchants). I don't know what this does for valuation, but interesting to think about the different incentives that governments have in the way that they treat these things over the next 5-10 years.

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 I guess what I am asking is where/what is the size differential of the moat?

 

To determine what is the moat, you can begin with how you choose the card(s) you own and use. For me it was just a matter of which one is offer by my bank. Then you can think it is a commodity. But wait, if my bank didn't offer MC or Visa then it would not do the trick. So for me it is a duopoly. There is Visa or  Mastercard that I must have, either one being as good as the other. The others I don't care.

 

So you have the view of 1 client, just 3 billions left to interview  ;)

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Re: Regulatory risk- I think it will always be there with these two, but I think that in a preverse way that enhances the moat (lack of new competitors) and allows for the duopoly.  In regards to Durbin, my reading is that, in it's current form, it will not be passed.  Some changes will be made, recently the Fed commented they are looking at increasing the .07-.12 cap.  In the V and MA calls, they talked about moving consumers...for example the higher end from debit to credit, and the lower end from debit to prepaid.  Furthermore, there is now talk of $ caps on debit cards.  At the end of the day, I think earnings risk is 12-18 months because the pie is growing. 

 

Re: V vs. MA- V dominates the debit business in US, MA in Europe.  V has a "put option" on Visa Europe that at some point may be purchased by V down the road.  I don't  think they do this option if someday down the road they didn't envision "V-E" to be a part of V:

 

We have granted Visa Europe a perpetual put option which, if exercised, will require us to purchase all of the outstanding shares of capital stock of Visa Europe from its members. Visa Europe may exercise the put option at any time. The put option provides a formula for determining the purchase price of the Visa Europe shares, which subject to certain adjustments, applies Visa Inc.’s forward price-to-earnings multiple, or the P/E ratio (as defined in the option agreement) at the time the option is exercised to Visa Europe’s adjusted sustainable income for the forward 12-month period, or the adjusted sustainable income. The calculation of Visa Europe’s adjusted sustainable income under the terms of the put option agreement includes potentially material adjustments for cost synergies and other negotiated items. Upon exercise, the key inputs to this formula, including Visa Europe’s adjusted sustainable income, will be the result of negotiation between us and Visa Europe. The put option provides an arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase price.

 

At September 30, 2010, we determined the fair value of the put option liability to be approximately $267 million. While this amount represents the fair value of the put option at September 30, 2010, it does not represent the actual purchase price that we may be required to pay if the option is exercised. The purchase price we could be obligated to pay 285 days after exercise will represent a substantial financial obligation, which could be several billion dollars or more. We may need to obtain third-party financing, either by borrowing funds or undertaking a subsequent equity offering in order to fund this payment. The amount of that potential obligation could vary dramatically based on, among other things, Visa Europe’s adjusted sustainable income and our P/E ratio, in each case, as negotiated at the time the put option is exercised.

 

Given the perpetual nature of the put option and the various economic conditions which could be present at the time of exercise, our ultimate obligation in the event of exercise cannot be reliably estimated. The following table calculates our total obligation assuming, for illustrative purposes only, a range of P/E ratios for Visa Inc. and assuming that Visa Europe demonstrates $75 million of adjusted sustainable income at the date of exercise. The $75 million of assumed adjusted sustainable income provided below, for illustrative purposes only, is based on Visa Europe’s forecasted financial results for the year ended September 30, 2010. However, this does not represent an estimate of the amount of adjusted sustainable income Visa Europe would have been able to demonstrate at September 30, 2010 or will be able to demonstrate at any point in time in the future. Should Visa Europe elect to exercise its option, we believe it is likely that it will implement changes in its business operations to move to a for-profit model in order to maximize adjusted sustainable income and, as a result, to increase the purchase price. The table also provides the amount of increase or decrease in the payout, assuming the same range of estimated P/E ratios, for each $25 million of adjusted sustainable income above or below the assumed $75 million demonstrated at the time of exercise. At September 30, 2010, our estimated long-term P/E ratio was 18.8 and the long-term P/E differential, the difference between this ratio and the estimated ratio applicable to Visa Europe, was 3.5. At September 30, 2010, the spot P/E ratio was 15.7 and the spot P/E differential, the difference between this ratio and the estimated spot ratio applicable to Visa Europe, was 1.6. These ratios are for reference purposes only and are not necessarily indicative of the ratio or differential that could be applicable if the put option were exercised at any point in the future.

 

Re: Moat/Scalability- I think the moat is their slogan "everywhere you want to be"  They have a fixed advertising budget, whether they issue 1MM cards or a 100MM that's where the operating leverage comes from.  Using the commerce toll road logic (don't think about market share) but V owns the toll road going to NY, and MA owns the one coming out of NY.  Going forward, the commerce tollroad for V/MA is like the NY tollroads in the 1930's, where as the NY tollroad is fairly mature (I don't think there will be an increase in the # of cars going in and out), the move from paper transactions to the services (card, mobile, health, employment, unemployment) offered through V/MA will grow.  I went to the World Cup last year, didn't take much cash (for safety reasons) and got away with using my V card everywhere.  Last week, V announced their intentions of setting up an office in Kenya to serve Africa.

 

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