Twice in the past, I have officiated a contest between two heavyweight stocks: Warren Buffett's investment vehicle Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B) and payment card giant American Express (NYSE: AXP).
While I'm a fan of both companies, in each of the two previous instances I chose Berkshire Hathaway as the better investment. Yet, as we're all aware, times change -- as do companies.
Will a new contest be third time lucky for AmEx?
Warren Buffett's Berkshire Hathaway is already a two-time winner vs. American Express. Can it complete a sweep? Image source: The Motley Fool.
Cash transactions are rapidly going the way of the dodo, in favor of payment cards and digital transactions. There's no real doubt which side is going to win The War on Cash (giveaway hint: the latter). This has been quite the boon to all payment card companies, and AmEx is no exception.
The company is a bit of an outlier in big plastic, since it has been forever pitched to wealthier cardholders, unlike mass brands -- and eternal rivals -- Visa and Mastercard. Smartly, AmEx over the past few years has bolstered perks for its cards and has enhanced its Membership Rewards loyalty program. This keeps those cards "sticky" and their owners eager to use them.
Scarred by the 2016 loss of its exclusivity as the only credit card accepted at Costco Wholesale, AmEx has done quite a good job securing new co-branding deals. New partners since that rather stinging defeat include Amazon.com and brokerage Charles Schwab.
AmEx is doing well in maintaining its position as the high-end payment card. This strategy, combined with the overall inexorable rise of payment cards and other noncash types of transactions, is juicing the top and bottom lines nicely.
Believe in Berkshire
Berkshire Hathaway is arguably best known for its stock portfolio, a mighty collection of mostly famous companies (like AmEx, incidentally). Over the many years the company has been alive, that portfolio has ballooned to a market value now estimated at a breathtaking $211 billion.
That alone would be reason to take a serious look at Berkshire stock. But this company is a unique animal.
Berkshire has two other powerful revenue streams: another portfolio stuffed with private companies not traded on any exchange (such as See's Candies and freight railroad operator BNSF) and the ever-growing insurance business.
Those two are doing well, thank you very much. Together, their revenue inched up (well, if you can consider "inching up" to mean "adding over $2 billion") between Q1 2018 and Q1 2019 to hit nearly $60.7 billion in the latter quarter. Altogether, they posted a net profit in excess of $21.6 billion for the period.
Few companies can boast of having a hat trick of sizable and productive asset groups. Berkshire's is a beautifully conceived business -- even in the unlikely event those well-run insurance operations have a rough quarter/year, the equity holdings will almost certainly make up for it, at the very least.
It's also built to last. The insurance business is never going to go out of style, the private businesses are generally dependable and longtime money earners, and the stock portfolio is high quality even if not all of its components are excelling at the moment.
And the winner is...
AmEx has the right focus at the right time. The world economy is still on the rise, for the most part, so it's a good move to invest in the perks and rewards that tempt cardholders into spending more. Following this strategy should keep the company growing at the strong rates it's been posting lately.
It's no Berkshire Hathaway, though. To be fair, no company is. Berkshire is a beast of a cash generator, a trait that filters down into the stellar returns it's been delivering for shareholders for many years. Buffett's not going to be around forever, but the brilliant business model he conceived almost certainly will be. And it'll keep making shareholders happier and richer. As before, then, I'm picking Berkshire as my victor here.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Berkshire Hathaway (B shares), Mastercard, and Visa. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.