Tag: American Express Company (AXP)

Investing Like a Billionaire: Everything Berkshire Hathaway Offers to Ordinary Investors

Posted on by The INO.com Team

With a $867.46 billion market cap, Berkshire Hathaway (BRK.A) (BRK.B), a diversified holding company, is led by Warren Edward Buffett, who is one of the world’s renowned investors with a long track record of successful capital allocation and value creation. As of May 8, 2024, he has a net worth of $133.50 billion, making him the eighth-richest person in the world.

Buffett’s substantial wealth primarily stems from his significant holdings in Berkshire Hathaway, a conglomerate with assets exceeding $1 trillion. Under Buffett’s expertise and exceptional leadership, Berkshire has historically delivered robust and consistent long-term growth, outperforming various other investment options.

From 1965, when Warren Buffett took control of the company, to 2023, Berkshire’s share price surged by a staggering 4,384,748%, surpassing the total return of the S&P 500 with dividends included of 31,223%. Additionally, Berkshire has continued its solid performance into 2024, with a double-digit percentage gain.

Berkshire’s Portfolio Reflects Buffett’s Investment Strategy

Known as the “Oracle of Omaha,” Warren Buffett stands out as one of the most accomplished investors of all time. He follows the Benjamin Graham school of value investing, seeking out securities with unreasonably low prices compared to their intrinsic worth. He often assesses the company’s long-term potential rather than short-term market trends.

Buffett considers company performance, profit margins, management team, and business model. He believes in investing in high-quality businesses with solid competitive advantages or “economic moats,” enabling them to maintain or expand their market share over time.

Sticking to his investment policy, Buffett’s holding company, Berkshire Hathaway, aims to “buy ably-managed businesses” possessing various characteristics, such as enduring competitive advantage, at extremely low prices.

For instance, the acquisition of See’s Candies in 1972 demonstrated Buffett’s strategy, as the company's robust brand and loyal customer base made it a highly profitable long-term investment. He favors companies with strong brands and business models that own their market niche, creating formidable barriers for competitors trying to enter and beat them at their game.

Berkshire Offers Diversification Across Industries

Berkshire Hathaway’s top holding is Apple Inc. (AAPL). Thanks to its strong brand and customer loyalty, it has remained one of Buffett’s favorite stocks for a long time. He has previously referred to AAPL as the “best business I know in the world.”

BRK.B recently disclosed that it had cut its stake in Apple by around 13% in the first quarter. It was reported that Berkshire’s Apple bet was worth $135.4 billion, implying nearly 790 million shares. Despite this trim, the iPhone maker is still Berkshire’s biggest holding by far, with a 39.8% weight in its publicly traded portfolio.

Another consumer goods company that Buffett loves is The Coca-Cola Company (KO). He recognized the company’s iconic brand, attractive dividends, and market advantages. Coca-Cola’s robust brand has enabled it to mitigate the impact of inflation by transferring higher costs to customers while still being able to generate growth.

At around 6.9%, KO is the fourth-largest holding in Berkshire’s portfolio. Berkshire owns a 9.3% stake in the company.

Meanwhile, Warren Buffett holds significant investments in the energy sector. During the fourth quarter of 2023, Buffett’s Berkshire increased its stakes in two major oil and gas companies, Chevron Corporation (CVX) and Occidental Petroleum Corporation (OXY).

Berkshire Hathaway owns about a 6.7% stake in CVX. According to Berkshire’s February shareholder letter, the firm also holds a 27.8% stake in OXY and has warrants to increase its ownership further at a fixed price.

Chevron (about 5.5% of the portfolio’s total weight) and Occidental (4.5%) provide investors with exceptionally good returns amid the inflationary periods and pay attractive dividends.

In addition, Buffett is fond of financial institutions and insurance companies, viewing them as a strategic bet on the long-term health of the U.S. economy. Berkshire's top two financial holdings are Bank of America Corporation (BAC) and American Express Company (AXP). These financial stocks comprise approximately 21% of the Berkshire portfolio’s total weight.

Outstanding First-Quarter Operating Earnings and Record Cash Hoard

For the first quarter that ended March 31, 2024, Berkshire’s total revenues increased 5.3% year-over-year to $89.87 billion. Revenues from Railroad, Utilities and Energy rose 11.2% year-over-year, and revenues from Insurance and Other grew 3.2%.

The Warren Buffett-led conglomerate reported first-quarter operating profit, which encompasses earnings from the company’s wholly-owned businesses, grew 39% from the year-ago period to $11.22 billion. This remarkable surge was led by a 185% year-over-year increase in insurance underwriting earnings to $2.60 billion. Insurance investment also soared 32% to over $2.50 billion.

However, net earnings attributable to Berkshire Hathaway shareholders declined by 64.2% year-over-year to $12.70 billion.

During the first quarter, the company’s cash pile reached a record high of $188.99 billion, up from $167.60 billion in the fourth quarter.

“We had much-improved earnings in insurance underwriting. And then our investment income was almost certain to increase,” Buffett said at Berkshire’s annual shareholder meeting in Omaha, Nebraska. “And I said that in the annual report because yields are so much higher than they were last year. And we have a lot of fixed, short-term investments that are very responsive to the changes in interest rates.”

Bottom Line

Berkshire Hathaway, led by a well-known investor, Warren Buffett, follows an intrinsic value investing approach, aiming at buying undervalued companies with solid fundamentals, competitive advantages, and long-term growth potential. Berkshire owns a diverse portfolio of businesses, including insurance, utilities, transportation, retail, and technology, among others.

Moreover, Berkshire’s top five holdings pay attractive dividends, which indicates Warren Buffett’s interest in stocks that offer a stable income stream.

Buffett’s conglomerate recently reported a significant surge in operating earnings in the first quarter of fiscal 2024, primarily driven by an increase in insurance underwriting earnings and a record cash pile that nears $200 billion.

USB analyst Brian Meredith maintained a Buy rating on Berkshire, citing the recent earnings beat and noting that Geico is on track to catch up to rivals Progressive and others on data analytics by 2025.

Berkshire Hathaway has historically delivered impressive and consistent returns. From 1965 to 2023, its share price skyrocketed 4,384,748%, more than 140 times the total return of the S&P 500, with dividends included. Moreover, Berkshire shares have already outperformed this year, with each share class having advanced more than 12%, while the S&P is up by nearly 8%.

Shares of BRK.B have gained approximately 16% over the past six months and more than 22% over the past year.

Looking ahead, analysts expect BRK.B’s EPS for the fiscal year (ending December 2024) to increase 14.6% year-over-year to $19.70. Further, the company’s EPS and revenue for the fiscal year 2025 are expected to grow 1.4% and 5.6% from the prior year to $19.97 and $376.61 billion, respectively.

Thus, by owning BRK.B shares, investors can gain exposure to Berkshire’s diversified portfolio of businesses, Buffett’s expertise, and stable growth and performance.

PayPal (PYPL) Struggles to Rebound Means Opportunity for 3 Stocks

Posted on by The INO.com Team

Leading fintech company PayPal Holdings, Inc. (PYPL) has underperformed the market, with its stock declining more than 30% over the past year. Investor interest in the digital payments company has declined due to rising competition and innovative disruptions brought by its peers.

The pandemic was a good period for fintech companies like PYPL. The fintech companies commanded high valuations as investors’ interest in the sector rose with accelerated digital technology adoption. Fintech companies played a vital role in supporting businesses and consumers during the crisis.

However, the high-interest rate environment and growing competition within the fintech sector have hit PYPL’s fortunes lately. Competition from the likes of tech giant Apple Inc. (AAPL), which has entered the sector with financial services such as the savings account from Goldman Sachs, which offers a 4.15% APY, Buy Now Pay Later Service, contactless payments through Tap to Pay on iPhone, Apple Card, and Apple Pay have affected PYPL’s market share.

Earlier this year, PYPL announced that it would lay off 2,000 people, or 7% of its workforce, to reduce costs and focus its resources on core strategic priorities. Although PYPL surpassed the consensus revenue estimate in the second quarter, it failed to top analysts’ earnings estimates.

Its EPS was 0.3% below the consensus estimate, while its revenue beat analyst estimates by 0.2% in the second quarter. Its net revenues for the second quarter ended June 30, 2023, rose 7% year-over-year to $7.30 billion. Its non-GAAP EPS came in at $1.16, representing an increase of 24% year-over-year. Also, its total payment volume increased 11% year-over-year to $376.50 billion.

However, PYPL ended the second quarter with 431 million users on its platform, declining 2 million sequentially and 4 million year-over-year. This was the second consecutive quarterly decline in its users. The decline in users is alarming as it affects PYPL’s revenue and earnings. For the third quarter, PYPL forecasted its revenues to grow approximately 8% to reach $7.40 billion.

Also, its non-GAAP EPS is expected to grow between 13% and 14% to $1.22 and $1.24. For fiscal 2023, the company expects non-GAAP EPS to grow approximately 20% year-over-year to $4.95.

SVB MoffettNathanson analyst Lisa Ellis downgraded PYPL to ‘market perform.’ Ellis said, “Looking forward, unfortunately, we expect PayPal’s gross profit growth to remain lackluster, in the low-to mid-single digits. We see the potential for further downside to our estimates, particularly given the strong momentum of Apple Pay, which we worry will begin to benefit from the powerful network effects in payments.”

Alex Chriss is expected to take over as the company’s new CEO from September 27. The change in leadership comes during a challenging period for the company. Although the appointment holds promise, whether the new CEO can turn PYPL’s fortunes around has to be seen.

Although the global digital payments and financial services ecosystem remains well-positioned to register strong long-term growth, PYPL faces several headwinds. Amid PYPL’s current challenges, fundamentally stable financial services stocks Visa Inc. (V), Mastercard Incorporated (MA), and American Express Company (AXP) might benefit.

Let’s discuss these stocks in detail.

Visa Inc. (V)

V is a global payments technology company that enables digital payments between customers, merchants, financial institutions, enterprises, strategic partners, and government agencies. It also administers VisaNet, a transaction processing network that allows for the authorization, clearing, and settlement of payment transactions.

On June 28, 2023, V announced that it signed a definitive agreement to acquire Pismo, a cloud-native issuer processing and core banking platform with operations in Latin America, Asia Pacific, and Europe. V’s Chief Product and Strategy Officer Jack Forestell said, “Through the acquisition of Pismo, Visa can better serve our financial institution and fintech clients with more differentiated core banking and issuer solutions they can offer their customers.”

V’s revenue grew at a CAGR of 11.6% over the past three years. Its EBITDA grew at a CAGR of 12.1% over the past three years. In addition, its EPS grew at a CAGR of 14.4% in the same time frame.

V’s 51.94% trailing-12-month net income margin is 101.4% higher than the 25.78% industry average. Likewise, its 67.09% trailing-12-month EBIT margin is 238.7% higher than the 19.81% industry average. Furthermore, the stock’s 51.61% trailing-12-month levered FCF margin is 252.3% higher than the 14.65% industry average.

V’s net revenues for the third quarter ended June 30, 2023, increased 12% year-over-year to $8.12 billion. Its non-GAAP net income rose 7% year-over-year to $4.50 billion. The company’s operating income increased 21.1% over the prior-year quarter to $5.02 billion. Its non-GAAP EPS came in at $2.16, representing an increase of 9.1% year-over-year.

Analysts expect V’s EPS and revenue for the quarter ending September 30, 2023, to increase 16.3% and 9.9% year-over-year to $2.24 and $8.56 billion, respectively. It surpassed Street EPS estimates in each of the trailing four quarters.

Mastercard Incorporated (MA)

MA is a technology company that provides transaction processing and other payment-related products and services. It facilitates the processing of payment transactions, including authorization, clearing, and settlement, as well as delivers other payment-related products and services. The company offers integrated products and value-added services for account holders, merchants, financial institutions, and businesses.

On May 26, 2023, MA and UniCredit announced the expansion of their payment partnership. The multi-year partnership will provide the necessary resources to achieve the shared ambition to increase the speed of innovation within the payments space and put customers at the center.

On April 5, 2023, MA announced that it was accelerating efforts to remove first-use PVC plastics from payment cards on its networks by 2028. This move reinforces the company’s sustainable efforts.

MA’s revenue grew at a CAGR of 13.3% over the past three years. Its levered FCF grew at a CAGR of 15.2% over the past three years. In addition, its net income grew at a CAGR of 11.8% in the same time frame.

MA’s 100% trailing-12-month gross profit margin is 67.9% higher than the 59.55% industry average. Likewise, its 57.14% trailing-12-month EBIT margin is 188.5% higher than the 19.81% industry average. Furthermore, the stock’s 0.63x trailing-12-month asset turnover ratio is 198.7% higher than the 0.21x industry average.

For the fiscal second quarter ended June 30, 2023, MA’s net revenue increased 14% year-over-year to $6.27 billion. Its non-GAAP net income rose 9.8% over the prior-year quarter to $2.74 billion. Its non-GAAP operating margin came in at 58.6%, compared to a non-GAAP operating margin of 57.9% in the year-ago quarter. Also, its non-GAAP EPS came in at $2.89, representing an increase of 12.9% year-over-year.

For the quarter ending September 30, 2023, MA’s EPS and revenue are expected to increase 20% and 13.4% year-over-year to $3.22 and $6.53 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters.

American Express Company (AXP)

AXP provides charge and credit payment card products and travel-related services. The company operates through three segments: Global Consumer Services Group, Global Commercial Services, and Global Merchant and Network Services. Its products and services include payment and financing products; network services; accounts payable expense management products and services; and travel and lifestyle services.

AXP’s revenue grew at a CAGR of 15.7% over the past three years. Its EPS grew at a CAGR of 26.5% over the past three years. In addition, its net income grew at a CAGR of 22.3% in the same time frame.

AXP’s 3.19% trailing-12-month Capex/Sales is 59.3% higher than the 2.01% industry average. Likewise, its 29.34% trailing-12-month Return on Common Equity is 159.7% higher than the 11.30% industry average. Furthermore, the stock’s 0.24x trailing-12-month asset turnover ratio is 12.2% higher than the 0.21x industry average.

AXP’s total revenues net of interest expense for the second quarter ended June 30, 2023, increased 12.4% year-over-year to $15.05 billion. Its net interest income rose 31.6% over the prior-year quarter to $3.11 billion. The company’s net income increased 10.7% year-over-year to $2.17 billion. Also, its EPS came in at $2.89, representing an increase of 12.5% year-over-year.

Street expects AXP’s EPS and revenue for the quarter ending September 30, 2023, to increase 19.7% and 13.6% year-over-year to $2.96 and $15.40 billion, respectively.