Top # 10: Wide Economic Moat Companies

Rohit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Rule #1: Never lose money. Rule #2: Never forget Rule #1.

 As markets very competitive, and predicting future, very difficult, important to focus on businesses that posses a long term advantage ( economic moat). Important, however, to understand that sustainable competitive advantage not based on products or market share, but long term pricing power. Key metrics include - free cash flow and Return on Invested Capital (ROIC).

A list of Top 10, companies with sustainable low risk business models. While all large international brands – a synopsis of their unique competitive advantage and long term moat.

  1. 1. 3M (NYSE: MMM) : Innovative culture, bottom-line focus, and low-cost manufacturing. While selling thousands of products to disparate end markets, the firm leverages only a few technological pillars across multiple industries. International markets provide higher profitability and 75% of operating profits.
  1. Coca-Cola (NYSE: KO): Strong brands in almost every non-alcoholic beverage category and extensive distribution network too costly for a new entrant to duplicate. Future growth driven off international countries where company is investing heavilly on distribution and bottling.

 

  1. Colgate Palmolive (NYSE: CL): Leading share in the oral care category and a solid portfolio of brands. Global footprint is as impressive as its ability to navigate often disruptive market conditions. Bulk of growth from faster-growing emerging markets (which already represent more than half of its total sales),
  1. Exxon Mobil (NYSE: XOM): Through a relentless pursuit of efficiency, technology, development, and operational improvement, it consistently delivers higher returns on capital relative to peers. Its integrated downstream assets offer earnings and cash flow in times of upstream weakness.

5. Johnson & Johnson (NYSE: JNJ): A leadership role in diverse health-care segments, including medical devices (40% sales) , over-the-counter medicines, and several pharmaceutical markets (35% sales). A diverse revenue base, robust research pipeline, and exceptional cash-flow generation .

6. McDonalds (NYSE: MCD): Strong brand, unrivaled scale advantages, cohesive franchisee system, and ample international growth opportunities. An annuity like stream of rent and royalties even during challenging economic times with minimal capital needs

7. Novartis (NVS) : A diversified operating platform that includes branded pharmaceuticals, generics, vaccines, diagnostics, eye-care products, and consumer products. Novartis runs several complementary operations that reduce overall volatility and creates cross-segment synergies.

 

8. Procter & Gamble (NYSE: PG): Economies of scale with an extensive global manufacturing and distribution network and unprecedented brand reach. Has been plagued by an erosion in pricing power, setbacks in its emerging-market growth strategies, and some cost pressures.

9. PepsiCo Inc (NYSE: PEP): Economies of scale, dominance in the snack category, and efficient distribution network. The direct store delivery system allows the firm to leverage its portfolio of brands. Replicating such a system would be prohibitively expensive for a competitor.

  1. Walmart Stores Inc (NYSE: WMT): Economies of scale creating a circular moat. Higher volumes allows larger pricing power over suppliers, allowing lower prices to customers, which in turn creates higher volumes. Success in taking market share from both traditional and non traditional competitors – allowing to grow at faster pace than overall sector .


Majority of companies with Free cash flow >15% sales and Return on Capiral (ROIC) > 10. Exxon and Pepsi with lower cash flow, but higher ROIC. Colgate at higher end and Walmart at lower end on both criteria.

Company

Ticker

Free cash flow as % Sales

RoIC

3M

MMM

12 - 15%

18 - 20%

Coke

KO

15 - 20%

13 - 15%

Colgate

CL

14 - 17%

30 - 35%

Exxon

XOM

4 - 5%

25 - 30%

J&J

JNJ

17 - 22%

10 - 12%

McDonald

MCD

15 - 17%

17 - 20%

Novartis

NVS

20%

10%

P&G

PG

12 - 15%

10 - 12%

Pepsi

PEP

8 - 10%

27 - 32%

Walmart

WMT

2,5 - 3,5%

10 - 12%

 

Valuations:

Key to Investing success is to buy wide moat companies at a discount (Margin of Safety). Not only does this provide strong pro

tection against downside risk, but also provides a good chance at earning high returns

With Dow and S&P closing in on 5 year highs, most companies appears to being fairly valued on both intrinsic and relative basis.

  • Intrinsic Value: Based on Morningstar analysis – all companies appear to be close to 100% of FV (if not higher).
  • Relative Value: Similarly they they are trading on a Forward Price Earnings on 10 – 15x and PEG Payback of 7 – 10 years

Ticker

Fair Value

Market Price

Price /

Fair Value

Forward

PE

PEG

ratio

PEG

Payback

MMM

102

103

99%

13,2

1,7

8,5

KO

36,75

38

97%

15,4

1,7

9,1

CL

108

100

108%

16,6

2,2

10,2

XOM

88,5

91

97%

9,9

1,9

7,2

JNJ

75,75

77

98%

12,7

2,5

9,1

MCD

93,5

94

99%

14,5

1,6

8,6

NVS

68,5

73

94%

11,8

2,2

8,4

PG

76

66

115%

17,1

1,8

9,6

PEP

72

75

96%

14,1

2,5

9,7

WMT

70,5

72

98%

10,9

1,3

7,1

(*) Fair Value using Morningstar estimates.

.

Conclusion

Value investing entails buying wide moat companies at a discount to thier value . Better, however - to buy a great business at a fair price, than a fair business at a great price. These # 10 companies have a wide econonomic moat and demonstrated track record. However, currently all fairly valued. Track closely and buy when at a discount.



xx


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