What business would you buy if price didn't matter? (a thought challenge)

[Liberty]

MasterCard/Visa - duopoly.  on a global basis, cash still accounts for 70% of transactions, therefore their is growth opportunities. Brand recognition/trust.  Inflation hedge - as dollars per transaction increases due to inflation, so does MA/V's profit as they take small portion of each of those transactions.

 

MA & V would be my picks as well. They're essentially a small tax on global consumer spending. As stated above, the transition from cash to plastic will provide growth for years. Both companies will also be able to leverage their brands and technology towards mobile payments. This all requires very little in terms of capital. MA has taken advantage of this by regularly buying back shares. Eventually both will be able to pay out sizeable dividends.

 

First picks that came to my mind too.

[Rabbitisrich]

 

But I have a hard time understanding the competitive advantages these low-investment businesses possess. It's obviously there. They're huge and profitable. I'm curious how you might describe their competitive advantage?

 

My guess is that NRSRO ratings improve communication. You don't really need a great analyst for that purpose; you just need a widely followed one, regardless of how he/she became widely followed in the first place. It would be difficult for a competitor to enter that status unless Fitch/MCO/S&P hugely screwed up while the competitor massively outperformed. That's a high volatility environment. In a normalized volatility environment, such excellence in rating might hurt more than help given the issuer-selected system. Catch-22 for a new entrant, which is probably why Egan-Jones was so keen to stand out during the wackiest period of 4Q11.

[Kiltacular]

MA & V would be my picks as well. They're essentially a small tax on global consumer spending. As stated above, the transition from cash to plastic will provide growth for years. Both companies will also be able to leverage their brands and technology towards mobile payments. This all requires very little in terms of capital. MA has taken advantage of this by regularly buying back shares. Eventually both will be able to pay out sizeable dividends.

 

I attended the recent meeting for Sequoia fund.  They made an interesting comment on Visa / Mastercard (they've owned MA, IIRC, for a long time and thier past bullish comments have been posted on this board).

 

To paraphrase: "The mobile payment threat is potentially quite big to V and MA.  Companies like Apple and Google have enormous networks of people that they could leverage to compete with V and MA.  The risk of mobile payments is that they can use ACH (Automatic Clearing House) to get around the V and MA payment networks.  To do so, however, they have to have bank account information and it is possible that people won't want their bank info. exposed.  But, it is very possible.  No one knows how it will shake out."

 

--

 

Again, the above is a paraphrase.  But, it got me thinking.  Isn't something like American Express a much better option than V or MA.  The standard -- recent -- counter argument is that Amex has credit risk.  Not much...take a look at their numbers. 

 

And, importantly on the subject above, what Amex does have that (as I understand it, V and MA don't) is a very powerful rewards program that keeps customers using their card.  Obviously, other card providers have rewards programs but those are mostly banks and the banks don't have the V / MA network. 

 

Amex has both and has the high-paying customers as well.

 

Just a thought when comparing V / MA to Amex when considering the mobile payments threat.

[A_Hamilton]

Wrigley's Gum.

[txlaw]

MA & V would be my picks as well. They're essentially a small tax on global consumer spending. As stated above, the transition from cash to plastic will provide growth for years. Both companies will also be able to leverage their brands and technology towards mobile payments. This all requires very little in terms of capital. MA has taken advantage of this by regularly buying back shares. Eventually both will be able to pay out sizeable dividends.

 

I attended the recent meeting for Sequoia fund.  They made an interesting comment on Visa / Mastercard (they've owned MA, IIRC, for a long time and thier past bullish comments have been posted on this board).

 

To paraphrase: "The mobile payment threat is potentially quite big to V and MA.  Companies like Apple and Google have enormous networks of people that they could leverage to compete with V and MA.  The risk of mobile payments is that they can use ACH (Automatic Clearing House) to get around the V and MA payment networks.  To do so, however, they have to have bank account information and it is possible that people won't want their bank info. exposed.  But, it is very possible.  No one knows how it will shake out."

 

--

 

Again, the above is a paraphrase.  But, it got me thinking.  Isn't something like American Express a much better option than V or MA.  The standard -- recent -- counter argument is that Amex has credit risk.  Not much...take a look at their numbers. 

 

And, importantly on the subject above, what Amex does have that (as I understand it, V and MA don't) is a very powerful rewards program that keeps customers using their card.  Obviously, other card providers have rewards programs but those are mostly banks and the banks don't have the V / MA network. 

 

Amex has both and has the high-paying customers as well.

 

Just a thought when comparing V / MA to Amex when considering the mobile payments threat.

 

I have passed on investing in M and VA before for the reasons articulated by Sequoia.  See http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/visa/msg22547/#msg22547

 

These guys will try their best to partner with the telcos to make sure they don't get cut out of the payments process.  See, for example, Isis Mobile Wallet.

[Vish_ram]

Costco

 

Trader Joe

 

Both have fanatic set of followers; you have a winning formula when the perceived value of goods/experience is far more than the price you pay.

[sswan11]

Trader Joe's is owned by Aldi, one of the biggest German supermarket chains.

[Kiltacular]

I have passed on investing in M and VA before for the reasons articulated by Sequoia.  See http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/visa/msg22547/#msg22547

 

These guys will try their best to partner with the telcos to make sure they don't get cut out of the payments process.  See, for example, Isis Mobile Wallet.

 

txlaw...Thx for linking to that old post of yours...good insights. 

 

Since the regulatory card has been played, it seems the biggest current threat to V / MA is now the networks of Google / Apple / MSFT you mention (Sequoia was a year behind you!).

 

I also find the rewards business for Amex a moat for them compared to the pure payments networks.  Also, someone like Buffett probably would say that AMEX has cache among the wealthy -- they want to actually pull out the AMEX Gold or Platinum card (so others might see it).  I think this gives them some protection at the high-end (where they concentrate, as you know) as compared to the mobile payments side of things (where I agree we'll very likely see enormous growth over time).  Just a thought.

[Evolveus]

MA & V would be my picks as well. They're essentially a small tax on global consumer spending. As stated above, the transition from cash to plastic will provide growth for years. Both companies will also be able to leverage their brands and technology towards mobile payments. This all requires very little in terms of capital. MA has taken advantage of this by regularly buying back shares. Eventually both will be able to pay out sizeable dividends.

 

I attended the recent meeting for Sequoia fund.  They made an interesting comment on Visa / Mastercard (they've owned MA, IIRC, for a long time and thier past bullish comments have been posted on this board).

 

To paraphrase: "The mobile payment threat is potentially quite big to V and MA.  Companies like Apple and Google have enormous networks of people that they could leverage to compete with V and MA.  The risk of mobile payments is that they can use ACH (Automatic Clearing House) to get around the V and MA payment networks.  To do so, however, they have to have bank account information and it is possible that people won't want their bank info. exposed.  But, it is very possible.  No one knows how it will shake out."

 

--

 

Again, the above is a paraphrase.  But, it got me thinking.  Isn't something like American Express a much better option than V or MA.  The standard -- recent -- counter argument is that Amex has credit risk.  Not much...take a look at their numbers. 

 

And, importantly on the subject above, what Amex does have that (as I understand it, V and MA don't) is a very powerful rewards program that keeps customers using their card.  Obviously, other card providers have rewards programs but those are mostly banks and the banks don't have the V / MA network. 

 

Amex has both and has the high-paying customers as well.

 

Just a thought when comparing V / MA to Amex when considering the mobile payments threat.

 

I have passed on investing in M and VA before for the reasons articulated by Sequoia.  See http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/visa/msg22547/#msg22547

 

These guys will try their best to partner with the telcos to make sure they don't get cut out of the payments process.  See, for example, Isis Mobile Wallet.

 

I agree that mobile payments poise a considerable threat.  I think in order for mobile payments to breach the moat and permanently impair the business would require MA/V's management to not do a couple things:

• 
   
  Do not continue to spend on R&D at all.
  Do not offer anything in the way of new product offerings/solutions.
  Do not continue to provide secure systems to uphold the value and trust of the MA/V brand.
  Do not strategically purchase businesses either in the name of defending the moat, growth, or cost savings.
  
• 
  

 

I would think that MA/V should have a significant enough head start, that even if the above happened, they should be ok for a good while.  I think that Paypal is a real threat in the electronic space.  Paypal helped eBay considerably in their most recent earnings beat.  I like eBay's halo effect plus the Paypal kicker. 

 

Amex is a great company and has many of the traits of MA/V, but due to that credit risk, albiet smaller than a Capital One or Discover due to their target demographic, it is awarded a much lower multiple than MA/V.

[Liberty]

 

I would think that MA/V should have a significant enough head start, that even if the above happened, they should be ok for a good while.  I think that Paypal is a real threat in the electronic space.  Paypal helped eBay considerably in their most recent earnings beat.  I like eBay's halo effect plus the Paypal kicker. 

 

I would guess that most people on paypal use it with their credit card, no? I guess over time there could be a movement to direct account linking, but for that paypal would have to make people feel as safe as CCs which protect people from most forms of frauds right now.

[Kiltacular]

Amex is a great company and has many of the traits of MA/V, but due to that credit risk, albiet smaller than a Capital One or Discover due to their target demographic, it is awarded a much lower multiple than MA/V.

 

This is what I'm arguing doesn't make "sense" to me about the current attitudes by hedge funds on this issue.

 

But, it could be possible that I am missing something about the credit risk issue.  I don't think so, though.  My reasoning goes like this:  Heading into the crash, Amex did let its loans balloon a bit and Amex did rely on securitization for funding, etc.  It got down to where it did during the meltdown, I think, not primarily because of its credit risk but because of worries about it ability to get access to credit to fund its loan book.  That is, it got really cheap not primarily because of fears of losses on its loan book but due to fears of a liquidity squeeze.

 

Post crisis, Amex now has access to the FED window.  I don't see why they'll ever give this up.  Amex looks safer to me THAN IT EVER HAS BEFORE the crisis.  In fact, Amex seems to me to be the biggest winner of the crisis if it can keep access to the Fed window permanently.  From Amex's perspective, it can easily meet the capital requirements of the FED and still post enormous returns on tangible capital unlike pretty much everyone else that came out the other side of this.  Amex doesn't trade (like a Goldman) and so won't face an real restrictions that I can see from being a bank holding company. 

 

Meanwhile, it has its positive attributes whereby it owns the card issuer and the network.  And, it has a brand name that appeals greatly to the high spend customer.  As I mentioned, people with Gold and Platinum cards use them as status symbols and want to pull them out.  If you're sharing a meal at an expensive restuarant you and the guy in the other couple don't want to give both your mobile phones to the waitress -- you each want to pull out your AMEX.  You've got a Platinum card and him on the Gold.  Victory.  That's how people go about this stuff. 

 

Meanwhile, Amex provides a very, very generous rewards program that V and MA can't because they only handle the network.  The rewards are something that card users don't want to give up.  Since AXP owns the whole loop (except in the smaller subset of cards it is letting banks issue), it can offer rewards and keep total control of the customer. 

 

It possible I'm missing something crucial here -- I'm all ears.  But, it seems to me that post crisis, a firm like AXP should have a higher multiple than MA and V.  Though they all likely deserve very high multiples. 

 

Take a look at their recent fixed income presentation -- slide 13.  Their billed business is about equal to the next three card issues combined.  But, their period end loans are only a tiny percentage of the other players combined. 

 

They're making a lot more on every card for just a very little credit risk.  And, I'm arguing, they've got a stonger brand because people using the card want to make a statement (even if it is just "I'm a richer A**hole than you are."

 

I can't get the presentation to post -- attachment is too big, I guess. 

 

But, you can see it here: http://ir.americanexpress.com/phoenix.zhtml?c=64467&p=irol-FLS_05092012

 

 

[junto.investing]

MA & V would be my picks as well. They're essentially a small tax on global consumer spending. As stated above, the transition from cash to plastic will provide growth for years. Both companies will also be able to leverage their brands and technology towards mobile payments. This all requires very little in terms of capital. MA has taken advantage of this by regularly buying back shares. Eventually both will be able to pay out sizeable dividends.

 

I attended the recent meeting for Sequoia fund.  They made an interesting comment on Visa / Mastercard (they've owned MA, IIRC, for a long time and thier past bullish comments have been posted on this board).

 

To paraphrase: "The mobile payment threat is potentially quite big to V and MA.  Companies like Apple and Google have enormous networks of people that they could leverage to compete with V and MA.  The risk of mobile payments is that they can use ACH (Automatic Clearing House) to get around the V and MA payment networks.  To do so, however, they have to have bank account information and it is possible that people won't want their bank info. exposed.  But, it is very possible.  No one knows how it will shake out."

 

--

 

Again, the above is a paraphrase.  But, it got me thinking.  Isn't something like American Express a much better option than V or MA.  The standard -- recent -- counter argument is that Amex has credit risk.  Not much...take a look at their numbers. 

 

And, importantly on the subject above, what Amex does have that (as I understand it, V and MA don't) is a very powerful rewards program that keeps customers using their card.  Obviously, other card providers have rewards programs but those are mostly banks and the banks don't have the V / MA network. 

 

Amex has both and has the high-paying customers as well.

 

Just a thought when comparing V / MA to Amex when considering the mobile payments threat.

 

I believe mobile payments will either be their greatest threat or their greatest opportunity. Even as a threat though, I think people are often slow to change. For example, I'm stunned at the number of people that continue to use cash and checks. While the mobile payments industry holds great potential, I'm not sure people will adapt quickly enough to marginally affect V & MA's core business. While most of us no longer leave the house without a cell phone, there's still much to be said about the simplicity and usefulness of a debit/credit card.

 

Completely agree about AMEX. In fact, I hate myself for not pulling the trigger on AMEX in 2009. I must admit, I got too caught up in the whole credit risk. But you're absolutely right - AMEX possesses the same toll-like network. And because it's a closed loop, they see all the benefits, can charge more, etc. Their rewards program is unrivaled. Best of all, aside from Discover, AMEX has the smallest percentage of the market. Not only will they benefit from the cash-to-plastic trend, but they will also be able to chip away at V & MA's market share.

 

All in all, I'm a huge fan of this sector. Very difficult to replicate these networks.

 

[junto.investing]

Costco

 

Trader Joe

 

Both have fanatic set of followers; you have a winning formula when the perceived value of goods/experience is far more than the price you pay.

 

Nice pick. Trader Joe's is a fascinating business. Extremely well run.

[junto.investing]

 

I would think that MA/V should have a significant enough head start, that even if the above happened, they should be ok for a good while.  I think that Paypal is a real threat in the electronic space.  Paypal helped eBay considerably in their most recent earnings beat.  I like eBay's halo effect plus the Paypal kicker. 

 

I would guess that most people on paypal use it with their credit card, no? I guess over time there could be a movement to direct account linking, but for that paypal would have to make people feel as safe as CCs which protect people from most forms of frauds right now.

 

Liberty, this is a crucial point. V, MA, and AXP have all built global brands that are trusted and respected. This doesn't happen overnight. It will take a while for consumers and businesses to fully trust new mobile payment platforms.

[txlaw]

I agree with you guys that V and MA have moats -- when I made my commentary a while back on VISA, I was factoring in price you pay.

 

IMO, the saving grace for V and MA will be partnerships with various players in the payment systems (banks, telcos, OS providers).  I don't think that these guys will go away, and they will probably increase the absolute volume of transactions they handle.  However, from a market share perspective, I just don't know what's going to happen.  I like AXP because they are really forward thinking, and I expect them to take market share away from MA and V over time by working with savvy tech players like Square, Google, and maybe even Apple. 

 

One thing we should be on the look out for: Is the new iPhone going to have NFC built in or not?  If so, then you would expect a partnership between Apple and some of these payments guys.  And cuts of the transaction might start going to Apple.  Hard to say what their strategy will be.

 

 

[txlaw]

Here's an idea.

 

Bank of New York (BK).  You get a royalty on global growth in financial assets.  It's also a natural hedge against interest rates rising.

 

And the price is right.

[beerbaron]

Here's an idea.

 

Bank of New York (BK).  You get a royalty on global growth in financial assets.  It's also a natural hedge against interest rates rising.

 

And the price is right.

 

Funny just opened a position yesterday. It's a pretty nice business that trades at 10 times earnings.Buffet doubling it's stake made me pull the trigger.

 

BeerBaron

[txlaw]

Here's an idea.

 

Bank of New York (BK).  You get a royalty on global growth in financial assets.  It's also a natural hedge against interest rates rising.

 

And the price is right.

 

Funny just opened a position yesterday. It's a pretty nice business that trades at 10 times earnings.Buffet doubling it's stake made me pull the trigger.

 

BeerBaron

 

Is that a WEB position?  It looks like it might be a Todd Combs or Ted Wechsler, as opposed to WEB.

[txlaw]

I'm a big fan of AMZN as well, though I would never buy it at current prices.

[PlanMaestro]

Here's an idea.

 

Bank of New York (BK).  You get a royalty on global growth in financial assets.  It's also a natural hedge against interest rates rising.

 

And the price is right.

 

That is a good one txlaw and it seems that the trials against them and State Street are doing OK.

[beerbaron]

Here's an idea.

 

Bank of New York (BK).  You get a royalty on global growth in financial assets.  It's also a natural hedge against interest rates rising.

 

And the price is right.

 

Funny just opened a position yesterday. It's a pretty nice business that trades at 10 times earnings.Buffet doubling it's stake made me pull the trigger.

 

BeerBaron

 

Is that a WEB position?  It looks like it might be a Todd Combs or Ted Wechsler, as opposed to WEB.

 

I believe you are right, it's is the size of 130M so probably one of the two new guys.

 

BeerBaron

[txlaw]

Here's an idea.

 

Bank of New York (BK).  You get a royalty on global growth in financial assets.  It's also a natural hedge against interest rates rising.

 

And the price is right.

 

That is a good one txlaw and it seems that the trials against them and State Street are doing OK.

 

And it proves the point that, these days, one can find large nuggets of gold even where everyone is looking rather than wasting time on trying to find golden needles in haystacks.

 

Of course, if it's your job to find golden needles in haystacks, can't fault you for it, I guess.

[jeffmori7]

What about IKEA?

 

I know it's a private company, we don't have any ideas about the numbers, but since it's look like its always crowded (the one near I live) and offering interesting product with u quite unique vision, I would think it should be great to own!

[PlanMaestro]

What about IKEA?

 

I know it's a private company, we don't have any ideas about the numbers, but since it's look like its always crowded (the one near I live) and offering interesting product with u quite unique vision, I would think it should be great to own!

 

Company is private but the numbers are public

http://www.ikea.com/ms/en_CN/about_ikea/press/press_releases/Welcome_inside_2010.pdf

[Poor Charlie]

The S&P Index business.  A royalty on the capital markets.

 

-Very hard to recreate a benchmark index.  S&P, DJI, MSCI have built their indices up over +50 years.

 

-Requires VERY little capital with no incremental capital needed to grow.

 

-Collects a fee based on AUM for ETF/MFs using S&P IP.  These products have been growing like weeds and will likely command a larger percentage of global invested capital in the future.  Even without inflows revenues will grow in line with capital markets ( +12% CAGR S&P 500 =  +12% CAGR S&P ETF royalty revenue).

 

-Collects per transaction fees for S&P derivative products (S&P E-minis, etc).  Equity derivative volume has increased by 17%/ year for the last 30 years and has become a major part of the capital markets.  Unlike equities that are fungible across exchanges, equity derivatives are proprietary and trade on a single exchange (monopoly w/ network effects).  If the S&P DJ merger is approved S&P will get a percentage of gross profit of ALL equity based derivatives traded at the CME.  All the benefits of being a part of the largest futures exchange without the clearing risk or capital investments (Think MA/V but without any capital investment).

 

-Collects monthly data fees for access to S&P index data.

 

Given the above I cannot see how the index business does not outperform the index  ;D