Charging Around the Globe

 | Feb 03, 2014 | 8:00 AM EST
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I am on vacation in Vietnam, lounging on a beach and marveling at the transformation of an emerging economy after its repudiation of a communist system -- although they still call themselves the "Socialist Republic of Vietnam". World travel always initiates my thought process around global brands, especially those in which we can invest and profit.

Coca Cola (K) and Disney (DIS) are the poster children for American leadership, but are not necessarily great investments -- just good ones. Coca Cola is approaching saturation. Although there is plenty of room to grow per-capita consumption around the world, the base is so large that the result will be sub-10% growth.

Disney owns an extraordinary franchise, but export is simply difficult. The theme parks are a key source of revenue, but they can only build so many, and "export" of the U.S. parks requires flying people in.

Traipsing about the world, paying by credit card, reinforces my keen interest in Visa (V) and MasterCard (MA). In my opinion, these are the best investable new global brands you can find in the U.S. market today. I use the word "new" loosely, since both have been in operation for decades. As investment opportunities, however, they are relatively new, meaning their addressable markets are underpenetrated.

The secular tailwind favoring both V and MA is the inexorable shift of payments from cash to electronic. This trend is permanent and unstoppable for many reasons. They provide convenience, record-keeping, traceability and tax enforcement, safety and cash flow management. The list goes on. Most countries are far behind the U.S. and Europe in adopting electronic payments, so there is plenty of room to grow.

V and MA are also beneficiaries of technological advancement, rather than threatened by it. The principal trend in computing and communications -- faster, cheaper and smaller -- enhances their ability to deliver their product, and reduces their capital expense per unit.

Most importantly, V and MA have a defensible franchise in the form of brand recognition and network effects. Presumably, anyone could create a payment processing network, but how will you replicate the millions of locations that accept your card? The last company to try this was Discover some 30 to 40 years ago, with some level of success -- but in an era when "BankAmericard" et al were far less ubiquitous.

The business is really a stable oligopoly with American Express (AXP) limited to the high end, Discover (DFS) serving the low-end and V and MA ubiquitous around the world. The only potential competitor could be PayPal, but the dirty little secret is that Paypal runs on top of the ACH and credit card processors, so it is more likely to enhance volumes than steal them. China's UnionPay will probably dominate its domestic market due to protectionism, but is unlikely to make inroads globally, similar to JCB (the Japanese network).

V and MA are notable relative to AXP and DFS because they take no balance sheet risk. Banks fund the credit in their networks, unlike the latter two. This is a critical difference that really matters in times of financial stress. During the financial crisis in 2008, both V and MA lost 50% of their value -- exactly in line with the S&P 500. Conversely, AXP lost over 80% as investors worried if credit quality would sink it.

I classify V and MA as "single best ideas" that will be outstanding long-term investments. Since going public, investors (including myself) have made multiples in these stocks, but there is still plenty of growth ahead.

These are the types of stocks I put into my IRA, my daughter's college funds, etc., and just let them grow and grow. They pass one of Warren Buffett's key tests: you can examine the business and envision what it will look like 10-or 20-years hence. Not a lot will change for V and MA, other than they will continue to grow as electronic payments get adopted around the world.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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