Fiserv and Financial Regulation

A new holding that showed up on Berkshire Hathaway's recent stock holdings was Fiserv Financial. Fiserv is a financial services company that specializes in various payments and processing services such as ACH, debit, credit and check images to name a few. The firm serves a broad array of firms in industries like banks, utility companies, healthcare, retailers and municipalities.

The company has had sustained a return on equity of no less than 13% for the past 10 years and as high as 22% in 2008. Fiserv had a times interest earned for the past 10 years in excess of 15 and has also had 10 consecutive years of free cash flows. It trades just under a p/e ratio of 13 for this years earnings. From a financial standpoint it meets many of the qualities Warren Buffett looks for in a stock. Whether it has some kind of moat or is a low-cost producer, I don't know. Being an exceptional business insulated from competition, however, is truly what Buffett looks for. The company does offer a lot technology to banks and thus stands to gain if the condition of banking industry improves. Buffett's steepening position in Wells Fargo and comments about housing may speak to that.

The newspaper American Banker had written an article that gave mention to Fiserv. It spoke about opportunities for firms in wake of the recent financial legislation. In particular they mention the benefit of point of sale machines that can determine the cheapest processing option. One of the features of the bill is the chipping away of the visa-mastercard stronghold of processing payments. The paper writes that a "visa-branded debit card that is currently linked only to Visa's Interlink network for PIN transactions, for example, would have to add another network not owned or operated by Visa to satisfy the requirement." Those other networks would include companies like Discover and Fiserv among others.

The paper also notes that transaction costs for debit cards are expected to be cut significantly further putting a dent in the mastercard-visa moat. The manufacturer Hypercom stands to benefit as newer models of their credit swiping machines with capabilities of finding the cheapest processer should show increased demand.

The Lebron-Buffett Connection

In "Common Stocks and Uncommon Profits" Phillip Fisher delves into a notion known as "scuttlebutt" where the investor engages himself in the business and discerns as much as they can about the firm. This could entail going to the firm directly and trying to glean what nuggets of value that could not be otherwise obtained elsewhere. It could include visiting factories, talking to foremen and getting a feel for the operations and determining if it is a productive operation. Going further you could ask managers how they feel about competition, where they stand in regards to competition and if they could not hold shares in their company then which competitor would they hold shares in. Fisher acknowledges it can be a burdensome task, but it can yield very profitable information.

Warren Buffett credits Fisher for many of his values, though Benjamin Graham did have a much greater influence on him. It would seem to me that Buffett has extended this notion in a unique fashion. Berkshire Hathaway owns about $500 million shares worth of Nike. Nike incidentally has held and recently re-signed a contract with Lebron James in March though the terms were not disclosed. For the past couple years Buffett has been befriending Lebron and even commented something to the extent that "if Lebron was a stock, I'd buy him." Technically Lebron's success is intertwined with his. Lebron's relationship to Nike is no different than a steel factory is to Arcelor-Mittal; Lebron is considered an asset to Nike.

Now it could entirely be a genuine relationship. Buffett who has been a big fan of baseball may just have grown excited about basketball being that Lebron was playing so close to Omaha. Or it could be that he is very interested in the true character of Lebron. As the Tiger Woods and Kobe Bryant scandals have evidenced, shortcomings in character can be quite costly to a company grounded in image. Knowing that Lebron is closer to a John Stockton or Michael Jordan in character rather than a Charles Barkley or Jason Kidd would be valuable information to a shareholder of Nike. Buffett has similarly cultivated relationships with Derek Jeter among other Nike partners.

To put it in figures, the contract Lebon had signed in 2003 was $90 million for 7 years, the more recent one will likely be a much larger sum. Nike made about $1.9 billion this past year and footwear contributed the largest to revenue at 54% followed by apparel at 27%. Sales in both categories would likely see a boost from Lebron, exactly how much is hard to tell.

Now this may all seem like conspiracy theory, but I believe Buffett is all business. Whether the investment was made by him or Lou Simpson who manages the Geico portfolio should make no difference. Being that it is a significant holding of Berkshire should make him very interested in the potential for Nike. Nike is a relatively small investment compared to Coke or Wells Fargo, but it certainly hinges on brand and the quality of the underlying athletes that represent the company. Buffett says of risk, "risk is what you don't know." This effort to get to know Lebron seems very much a move to reduce the risk in Nike.