Potential Elephants for Warren Buffett

Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As many of us know, Berkshire Hathaway (NYSE: BRK-A) is generating an increasing amount of cash. As the company does not pay a dividend and very unusually buys its own shares (in 2012 Berkshire did a $1.3 billion share re-purchase), it must re-invest those proceedings somewhere.

The good news for shareholders is that the man in charge of investing Berkshire's money is the best asset allocator in modern history, Warren Buffett. Let's learn about two huge companies Warren would surely enjoy owning. We all know he likes sustainable businesses (businesses with a strong business moat) that generate increasing amounts of cash. Nobody knows what Warren's next investment will be, but we do know that he is looking to put large sums of cash to work. In his own words, "The second disappointment in 2012 was my inability to make a major acquisition. I pursued a couple of elephants, but came up empty-handed."

The company behind your payroll.

Automatic Data Processing (NASDAQ: ADP), the largest provider of payroll processing and tax filing services to American corporations, has a strong business that is tough to replicate. The company is extremely well positioned to benefit from loosening sales cycles, rising interest rates, and the currently improving labor market. As management has adjusted its cost structure during the 2009 downturn, Automatic Data Processing (or simply ADP) should be ready to realize operating leverage as the US economy improves.

Growing sales at 7% year-over-year (yoy) and EPS at 9% yoy, ADP trades at a reasonable 2013 23.6 times P/E. With its $33.4 billion market capitalization, the company is mammoth in size. That said, it looks like an affordable animal from Warren's perspective. After all, he said he was looking for big elephants.

The network behind most your purchases.

According to Warren's 2012 letter to Berkshire investors, Berkshire owns 13.7% of American Express, which is a wonderfully profitable business. That said, American Express does not own the biggest payment network in the world. Visa (NYSE: V) does. I have always been highly attracted to Visa's strong brand, its global acceptance network and its profitable business model. The company will benefit from the long-term shift from paper (paper currency) to plastic, the rapidly growing globalization of consumption, and from consumer spending growth in emerging economies.

In a few words, Visa has a the biggest debit franchise in the US, is growing fast in international markets and does not issue cards or extend credit. Besides, the mobile payment phenomenon, which many used to viewed as a threat, now seems to be helping Visa's network acceptance in both developed and emerging economies.

Growing in the US (US purchase volume rose 12% YoY) and owning the biggest share of e-market transactions (+47%), I believe Visa is a great asset to own. As usual, Value comes at a price: Visa trades at 2013 24.5 times P/E and pays a 0.7% cash dividend yield.

My Foolish conclusion.

Of course, I am not implying that Berkshire shall invest in any of the companies named above. Nevertheless, it is difficult to argue that those companies do not fill many (or most) of the requirements needed to become a Buffett investment. Clearly, price could be an issue. ADP and Visa trade at significant premiums to the market's average (the S&P 500's P/E multiple is 18.4). That said, those companies don't own average businesses. Always remember: "Price is what you pay, value is what you get."

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Federico Zaldua has no position in any stocks mentioned. The Motley Fool recommends Automatic Data Processing and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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