While the S&P 500 gained 12.19% in the last year, three of Warren Buffett’s financial stocks outperformed the market: American Express Company (NYSE:AXP) with a 12.25% gain, Mastercard Inc (NYSE:MA) with a 19.96% advance, and Visa Inc (NYSE:V) with a 36.14% surge.
American Express Company (NYSE:AXP)
American Express Company (NYSE:AXP), with a market cap of $72 billion, is the most profitable closed-loop credit card network in the U.S., providing credit and travel services to affluent customers.
Warren Buffett’s portfolio currently holds 151,610,700 shares of American Express Company (NYSE:AXP). However, no acquisition was made in 2012.
Barclays reiterated an overweight rating and increased its target price from $68 to $75 for American Express on April 8. Analysts currently have a mean target price of $66.43 for American Express Company (NYSE:AXP). Analysts, on average, are estimating an EPS of $1.12 with revenue of $8.05 billion for the current quarter. In the last four quarters, American Express had two positive surprises and two in-line results. American Express is expected to release its first quarter 2013 earnings on April 15.
American Express had higher revenue growth in the past three years compared to its peers. Despite lower margins, American Express generates a higher ROE of 23.8 as compared to the average of 16.7. American Express has a healthy balance sheet with low debt/equity ratio of 3.1, compared to the average of 3.4. American Express’ current P/E, P/B, and P/S of 16.9, 3.8, and 2.4, respectively, are all below the industry averages of 29.9, 3.9, and 5.0. American Express’ forward P/E of 12.4 is also lower than the S&P 500’s average of 14.3. Although American Express’s current P/E is higher than its five year average P/E of 14.6, American Express remains undervalued compared to its peers.
In short, American Express’s management continues to enhance shareholders’ value in the right direction, and its board approved the repurchase of up to 150 million common shares in late March. With 5-6% revenue growth expected for the next two years and lower charge-off rates, American Express is improving its bottom and top line. Any major pullback is a great buying opportunity for American Express.
Mastercard Inc (NYSE:MA)
Mastercard Inc (NYSE:MA), with a market cap of $64.78 billion, is a global payment and technology firm operating the second-largest open-loop card network in the world, and providing various services in support of credit, debit and related payments programs. Warren Buffett’s portfolio currently holds 405,000 shares of MasterCard.
On March 18, 2013, BNP Paribas initiated coverage on Mastercard Inc (NYSE:MA) with a hold rating and a price target of $560.00. Analysts currently have a mean target price of $581.60 for MasterCard, suggesting a 10.23% upside potential based on the closing price of $527.64 on April 9, 2013. Analysts, on average, are estimating an EPS of $6.18 with revenue of $1.93 billion for the current quarter. MasterCard had four positive earnings surprises in the last four quarters. MasterCard is expected to release its first quarter 2013 earnings on April 26.
Fundamentally, Mastercard Inc (NYSE:MA) achieved high revenue growth in the past three years as compared to the industry average. MasterCard is managed efficiently, resulting in high margins and a strong ROE of 43.2 (vs. the industry average of 16.7). MasterCard has a solid balance sheet with $5.04 billion total cash and a small total debt of $51 million. The company also generates a strong operating cash flow of $2.95 billion with a leveraged free cash flow of $1.68 billion. From a valuation perspective, MasterCard’s P/E of 24.3 is below the industry average of 29.9. However, MasterCard’s forward P/E of 17.4 is higher than the S&P 500’s average of 14.3, which can be justified with its higher growth rate.
In short, MasterCard offers a limited risk, open-loop business model, which makes it a solid long-term holding. MasterCard offers a strong balance sheet with a solid cash flow. However, in the near-term, MasterCard may be trading in a tight range as it consolidates. Conservative investors may want to establish a long-term position after pullbacks.
Visa Inc (NYSE:V)
Visa Inc (NYSE:V), with a market cap of $108.93 billion, is a global payments technology company, enabling customers to use digital currency instead of check and cash. Visa Inc (NYSE:V) operates processing networks, called VisaNet, and an open-loop payment networks. Visa generates revenue by charging its clients different fees based on the dollar volume and the number of transactions.
Warren Buffett’s portfolio currently holds 1,555,459 shares of Visa Inc (NYSE:V). However, 524,200 shares and 785,349 shares were sold by Buffett in the second and third quarters of 2012, respectively.
On March 18, 2013, BNP Paribas initiated coverage on Visa with a hold rating and a price target of $166.00. Analysts currently have a mean target price of $175.03 for Visa, suggesting 6.24% upside potential. Analysts, on average, are estimating an EPS of $1.81 with revenue of $2.85 billion for the current quarter ending in March, 2013. In the last four quarters, Visa had four positive earnings surprises. Visa is expected to report its second quarter 2013 earnings on May 1.
Fundamentally, Visa has higher revenue growth (three year average) of 14.7 than the industry average of 5.5. However, Visa has a lower operating margin of 21.6% and a slightly higher net margin of 22.5%, compared to the industry averages of 43.0% and 21.2%, respectively. Visa also generates a lower ROE of 8.8 compared to the average of 16.7. Visa has a healthy balance sheet and generates strong cash flow. From a valuation perspective, Visa’s P/E, P/B, and P/S of 65.8, 4.8, and 14.8, respectively, are all above the industry averages of 29.9, 3.9, and 5.0. Visa’s P/E is also higher than its 5 year average P/E of 46.6. Visa’s Forward P/E of 19.1 is also higher than the S&P 500’s average of 14.3.
In short, Visa remains one of the most recognized brands in the world. Visa’s business model is simple, and the company makes money whenever a Visa card is swiped. Despite its solid cash flow and a zero debt balance sheet, Visa may be currently overvalued. Investors may want to establish a long-term position after any pullbacks. Investors can also consider leveraging options strategies to acquire Visa stocks at a lower price, such as credit put option spread strategy.
Bottom line
While each of the above companies offers a simple, easy-to-understood business model with a globally recognized brand, MasterCard and Visa offer faster growth while American Express provides a cheaper free cash flow. Any major pullback would be a great buying opportunity for all three stocks. However, investors are recommended to do their own due diligence and research before making any trading or investment decisions. All of the above stocks may not be suitable for conservative investors seeking stability or income.
The article Buy these 3 Buffett Financial Stocks on a Pullback originally appeared on Fool.com is written by Nick Chiu.
