Berkshire Hathaway Inc. (BRK.A), Automatic Data Processing (ADP): Potential Elephants for Warren Buffett

As many of us know, Berkshire Hathaway Inc. (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 Hathaway Inc. (NYSE:BRK.A) 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 Hathaway Inc. (NYSE:BRK.A)’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, Automatic Data Processing (NASDAQ: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 Hathaway Inc. (NYSE:BRK.A) investors, Berkshire Hathaway Inc. (NYSE:BRK.A) owns 13.7% of American Express Company (NYSE:AXP), which is a wonderfully profitable business. That said, American Express Company (NYSE:AXP) does not own the biggest payment network in the world. Visa Inc (NYSE:V) does. I have always been highly attracted to Visa Inc (NYSE:V)’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.