50 Wide MOAT Companies, which one reigns supreme?
Find it at the end of the article
First a message.
At the end of August, you received a short survey to get feedback on my writing. Thanks again to all of you who took the time to get back to me. I’ll share the results of the survey shortly and what I plan to improve. For those interested, a paid plan will be offered with articles that take more time and money to research. But more on that in the future.
As promised, my 8-year-old son hand-picked a winner for a gift. I can now happily send it to one of you. And the winner is?
Casper!
You’ll be receiving the package in the mail shortly.
Thanks again and on to this week’s article ⬇️
About a year ago, I wrote about finding companies with a MOAT:
Michael Mauboussin updated his paper “Measuring the MOAT'“ last week, so it’s time to revisit what we know about MOATS.
Today we’ll cover:
The basics of MOATS
Some highlights from Mauboussin
A list of 50 wide MOAT companies and which look best
Let’s dive in ⬇️
The basics of MOATS
3 factors drive a company’s sustainable value creation:
If it grows with a spread: ROIC > WACC
If it can reinvest some of it to keep on compounding its value
How long can the company do this: the duration of the value creation
Let’s take a look at a quick example of a company we’ve written about in the past:
Does Dino have a spread?
It does.
In addition, the ROIC is growing which is great.
Can Dino reinvest its proceeds?
It can. Over the last decade, Dino has reinvested about 100% into the buildout of new stores. In 2023, it ‘only’ reinvested 60%. This should increase at the end of this year as management wants to once more accelerate store construction. However, the reinvestment rate should decrease as more and more profits are earned each year unless Dino finds other venues to redeploy their capital.
For how long can it do this?
Now that’s the big question. Dino has about 2,500 stores in Poland. Estimates of future potential average out on about 5,000. Let’s assume 250 stores each year, it will take them a decade to get there.
This shows the future runway but says nothing about how long they can hold their ROIC > WACC. For simplicity, we’ll say they can, and their duration is 10 years.
Can we conclude Dino has a sustainable competitive advantage, a MOAT?
I’m afraid it’s not that simple.
MOATS are relative. In a market, many players can create value. It’s not only about the absolute value creation of the company, we need to focus on what it does differently, and how big the GAP is with its competitors.
More importantly, we need to know if the GAP is widening or narrowing. If a company can earn high ROIC consistently with a high reinvestment rate compared to its competitors, it will become more and more difficult for the others to catch up.
Let’s see if we can find some data. These are the biggest players in the Polish grocery retail market (in Billion Zloty revenue)
Not all of these are publicly traded. In addition, the market leader, Biedronka generates about 75% of the sales of the mother company Jeronimo Martins. Either way, let us compare these 3 companies:
We’ll look at:
Gross profit margins
Reinvestment rates
ROIC
Bonus metric: The Cash Conversion Cycle (CCC) which is important in retail:
Gross Margins
There is a GAP in gross margins between Dino and the others. There has been an inflated gross margin for Dino since 2020. Things seem to normalize. The question will be if Dino can hold on to its margins in the future.
Reinvestment rates
All 3 companies have had high reinvestment rates, however:
Dino’s has reduced to about 80%
Biedronka has increased to 115%
Eurocash’s has plummeted completely
Bonus: Cash Conversion Cycle
In retail, you expect the retailers to use their power and generate a negative cash conversion cycle. Let’s see:
This time, it looks better for Biedronka. Biedronka is the biggest player in town, so it seems feasible that would play that out towards their suppliers.
Conclusion
Based on these metrics, Dino is still the “best compounder”. It remains to be seen if it can maintain its GAP in Gross Margins and ROIC.
These metrics are symptoms that Dino is doing something that the other players have difficulty replicating. We must be aware of causality.
A company with a MOAT has a higher chance of displaying these positive symptoms
A company that displays these symptoms does not necessarily have a MOAT
As an investor, you’re the doctor, looking at the symptoms, and trying to figure out the actual causes for these symptoms.
The Mighty Mauboussin
Here’s the link to his updated 100-page paper on “Measuring the MOAT”. I’ll discuss some new charts he has published that I feel are worth sharing.
Morningstar data
As we discussed in the intro, it’s not only the strength of a MOAT that matters, it is the duration that MOAT can be held. High-profit margins draw in the competition. The duration at which that competition can be fended off is crucial.
For 10 years, Pat Dorsey was the director of equity research at Morningstar. Morningstar uses a rating system that measures if a company has a wide, narrow, or no MOAT.
Wide MOAT: Its competitive advantage is expected to last for more than 20 years
Narrow MOAT: Its competitive advantages are expected to last between 10 and 20 years
No MOAT
Michael took the data from Morningstar over the last 20 years. They have analyzed about 1600 companies. Here are the results:
About 17%, or 270 companies, are considered to have a wide MOAT. The remaining are split about 50/50 between narrow MOATs and no MOATS. When you look at the chart between 2005 and 2009, the number of wide MOAT companies was more or less stable at about 10%. Then, a slow increase ensued up until today.
Does it mean, more and more companies have transferred from narrow to wide?
We don’t have the data, but winners generally keep on winning. The transformation from tangible to intangible assets and the rise of network effects and switching costs, which are very powerful sources of moats, might explain this trend.
The company life cycle
We’ve talked about the company and competitive life cycle before, but a more accurate life cycle is presented which takes into account the evolution of ROIC throughout the cycle ⬇️
We should always be aware of where our companies are within their life cycle. If it has a MOAT, it will most likely be in the Growth or Mature phase.
Companies can travel between these phases depending on their business lines. We’ve talked about Innovative Food Holdings (Ticker: IFVH) in the past. The company was in a state between shake-out and decline. New management came in, they started to divest the ‘losing part’ of the business to travel from their current stage towards growth (to be determined) once more. At the moment, they are performing well, and the price follows suit:
But let’s be honest. It’s too early to tell if this company has a MOAT or not.
Brands
Are brands MOATS?
Maybe, not always. It depends. Does the brand create pricing power? How widespread is its mind share? Can it be replicated?
To illustrate this, here is a great chart. It compares to economic spread of the company (ROIC - WACC) with the brand ranking.
As can be seen from the chart, not all brands generate a positive economic spread (ROIC-WACC). Notable negative ones are:
IBM
Disney
Toyota
Samsung
Mercedes-Benz
These are all well-known brands, but if there is growth, that growth is destroying value at the moment.
Finding MOATS
We’ve mentioned that as an investor, you’re a doctor, and you need to interpret the symptoms. One way to do this is as follows:
Measure ROIC
Split ROIC in its 2 factors: NOPAT Margin and Asset Turnover
Using the below matrix, identify where the company is residing
Based on where it is, its competitive advantages are on the consumer side or the production side.
Finally, we can look at the “value stick” and see how this relates to the value creation of the firm:
If we take Costco as an example, it has clear distribution scale advantages. It can use its scale to negotiate better prices with their suppliers. This allows them to increase their value creation. But what does Costco do? It will give part of that value back to its customers. (scale economies shared), which increases loyalty and grows the business.
In other words, it does not maximize profits. It uses part of its profits to strengthen its MOAT. I do not see how Costco can be disrupted. Do you?
50 Wide MOAT Companies
Let’s look at some of these Wide MOAT Companies that Morningstar has identified and see if opportunities are available.
As a reminder, according to Morningstar, their MOATS will be held for the next 20 years. The list of companies is extracted from the Morningstar US Wide MOAT Index.
You can download the file ⬇️
Since these are mature companies, we’ll add the following metrics to this list:
Valuation: Forward FCF Yield
Growth: 3 and 1-year EPS growth
Efficiency: 3-year average ROIC
Profitability: FCF margin
Price: % of 52 WK High and Low
A quick TOP 3 ranking according to some of these criteria
TOP 3 Cheapest by Forward FCF Yield
Bristol Myers Squib: 14.4%
Etsy: Forward: 12.9%
Altria Group: 9.4%
TOP 3 Average 3Y ROIC
Lam Research Corp: 37%
Masco Corporation: 32%
Alphabet: 29%
TOP 3 Next Year EPS Growth
Amazon: 63%
Pfizer: 44%
Alphabet: 32%
These are all big companies. The smallest is Etsy with a 5.6 Billion USD Market Cap. It’s more difficult to find MOATS in smaller companies. For a patient with lots of symptoms, it is easier for the doctor to diagnose the causes. If the patient only has 1 symptom with few data points in time, it’s a lot more difficult. A small company, if it’s good, can be in the process of digging its moat while its house expands into a castle. But a moat is always linked to the castle. You won’t see a house with a moat.
There are some surprises though. Boeing can be considered to have a duopoly with Airbus, so the company appears in this list. But here is its ROIC over the last 10 years.
Yep, not looking good. I would not have added Boeing.
So, which company reigns supreme in this list? I’ll need to dig deeper as there are several companies I have never heard about. Adobe checks several boxes
FCF Yield: 4.2%
FCF Margin: 30+%
ROIC > 20%
1 Y FWD EPS Growth: 16%
Etsy looks optically cheap, but will it be able to grow in the future?
Note: Be careful with the numbers. An expected EPS growth next year for Amazon of more than 60%? Amazon has never optimized earnings. I would keep looking at operational cash flow instead.
Conclusion
The updated article from Mauboussin has allowed us to refresh our knowledge of MOATS and add additional data and charts. You can download the list of 50 companies and dig a little inside to see if something comes to the surface. There is no clear winner in the list, but Adobe checks a lot of boxes and Etsy has suffered lately and might benefit from a closer look.
May the markets be with you, always!
Kevin
Further Reading
If you’ve arrived here, then I thank you for reading everything, and if you want to delve deeper into MOATS, I implore you to check out a series of posts on MOATS written by
from Flyover Stocks.
Nice article but aaaahhhh stop capitalising moat! It doesn't stand for anything!
I would also consider the cost base, some companies like Costco and RyanAir have an incredible ability to keep costs low which keeps them profitable. A ‘bonus’ metric would be operating leverage. If you can generate additional revenues with costs increases at a slower rate, you set yourself up for margin expansion.