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Steven Chen
Steven Chen
Articles (105)  | Author's Website |

The 'Toll-Bridge' Business: Products With Few Substitutes

One of Warren Buffett’s favorite categories of investments

“In an inflationary world, a toll bridge would be a great thing to own because you’ve laid out the capital costs. You built it in old dollars, and you don’t have to keep replacing it.” - Warren Buffett (Trades, Portfolio)

Toll-bridge businesses are one of Warren Buffett (Trades, Portfolio)’s favorite investments. As a matter of fact, in the late 1970s, Buffett once bought shares of the Detroit International Bridge Company, the only toll bridge owned by equity investors in the U.S. at the time, through Blue Chip Stamps, a Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) subsidiary.

A toll bridge possesses several favorable characteristics to shareholders: e.g., a monopoly-like market position, durable pricing power and predictable recurring cash streams. All these are attributable to the fact (or assumption) that there are very few alternative routes to “compete” with the bridge loaded with heavy traffic. In our opinion, toll-bridge economics apply to other infrastructures as well, such as tunnels and airports.

Take Société Marseillaise du Tunnel Prado Carénage (XPAR:SMTPC) as an example. This French small-cap company operates the Prado Carénage tunnel, a 2.5km toll road enabling underground traffic to cross the city center of Marseille, which is known for its congestion. Actually, although the tunnel is one of the most expensive roads in France, so many vehicles use it that the traffic is not smooth, especially during rush hour. The concessionaire company earned an above 20% annual return on equity every year over the last decade (see below). We see similarly high returns across some critical airport assets as well. For instance, Grupo Aeroportuario del Pacifico (NYSE:PAC), which runs five of the top 10 Mexican airports, and Airports of Thailand (BKK:AOT), the operator for seven of the 11 international airports in Thailand, both steadily improved their returns on equity to over 15% lately (see below).

Indeed, the concept of toll-bridge business goes beyond physical assets. Think about MasterCard (NYSE:MA) and Visa (NYSE:V) in the payment processing space. Every time consumers initiate a purchase using their cards at the shop or online, the transaction goes through the network owned by either of the two oligopoly businesses, which earn a fee on every transaction.

NIC (NASDAQ:EGOV) is another example of digital toll bridges. The Kansas-based company builds digital solutions for governments to provide a higher level of service to businesses and citizens to increase efficiencies. It formed a long-term partnership with over 3,500 state and local government and federal agencies across the country based on a transaction-based sales model. This means that whenever you enjoy the convenience of online government services like renewing your vehicle registration or purchasing a national park ticket, NIC earns a commission.

All the above digital-toll-bridge businesses delivered above-normal annual returns on equity for the past decade, as you can see below.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Berkshire Hathaway, MasterCard and NIC.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital), and Urbem Capital, the research boutique that focuses on the highest-quality 0.1% of all public companies worldwide.

Steven can be reached at [email protected] or through LinkedIn.

Visit Steven Chen's Website


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