Profit from These Wide Economic Moats

By Jonathan Yates - July 29, 2012 | Tickers: BRK-B, KO, MCD, PEP, WMT, YUM | 0 Comments

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Coca-Cola (NYSE: KO), Wal-Mart (NYSE: WMT) and McDonald's (NYSE: WMT) are unique in that each has been one of the best performing stocks in history as a result of wide economic moats without any appreciable barrier-to-entry in any of the industries.  The wide economic moat for each has been the brand name established from the success of the company.  That is why owning the stock for each has been so rewarding for the shareholders.

Warren Buffett has stated that, "In business, I look for economic castles protected by unbreachable moats."  There basically are no barriers-to-entry in the beverage, retail store or fast food industry.   But Warren Buffett's Berkshire Hathaway (NYSE: BRK-B) is a major shareholder of both Wal-Mart and Coca-Cola.

Long ago, Buffett bought shares of Coca-Cola for the portfolio of Berkshire.  But there are hardly "unbreachable moats" in the beverage industry.  Major competitors such as PepsiCo (NYSE: PEP) and Cott Corporation have been joined by new entries over the decades such as Snapple, Red Bull and Jolt, among many others.  

But nobody does it better than Coca-Cola.  Its profit margin is 18.49% with sales growth over the past five years of 14.09%.  For PepsiCo, the profit margin is just 9.63% with sales growth over the past five years of 13.61%. Cott Corporation, the largest private label soft drink maker in the world, has a profit margin of 1.73% with sales growth over the past five years of 5.67%.

There is certainly no shortage of competitors in the fast food industry, both private and publicly traded.  In the burger sector, there is Burger King, Wendy's, Hardee's, Inn N Out, Five Guys, Shake Shack and Smashburger, to name but a few.  Yum! Brands (NYSE: YUM) competes for the fast food dollar with its KFCs, Taco Bells and Pizza Huts.  But McDonald's makes more from each fast food dollar from those strolling in under the Golden Arches than does Yum! Brands with a profit margin of 20.26%.  By contrast, the profit margin for Yum! Brands is only 11.58%.

The retail sector does not lend itself to double digit profit margins, resulting in Wal-Mart having one of 3.68%.  But sales and earnings-per-share for Wal-Mart are steadily rising.  Over the past five year, earnings-per-share growth for Wal-Mart has been 9.19%.  On a quarterly basis, sales growth is higher by 8.47% and earnings-per-share have jumped by 12%.  For big box competitor Target, earnings-per-share for the past five years has been 5.95%.  Sales growth is rising by 5.85% on a quarterly basis for Target with earnings-per-share growth higher by 4.92% over the same period.

In addition to being profitable and paying a healthy dividend income to the shareholders, the global presence of McDonald's, Wal-Mart and Coca-Cola is a wide economic moat.  There are more than 33,000 McDonald's in about 120 countries.  Wal-Mart shoppers are called to attention in 15 countries outside of the United States, with a very strong presence in China.  There are only two nations in the world where Coca-Cola is not enjoyed: Cuba and North Korea.

As Buffett once said about that regarding Coca-Cola, “If you gave me $100 Billion and said, ‘Take away the soft-drink leadership of Coca-Cola in the world’, I’d give it back to you and say it can’t be done."  It is easy to enter the beverage, fast food or retail store market as the barriers to entry are minimal.  But it is difficult to survive by challenging Coca-Coal, McDonald's or Wal-Mart as the economic moat of each is virtually impossible to breach.  As Buffett stated, "...it can't be done."

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