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Morningstar: The Four Moats That Matter

September 03, 2010


Morningstar's Pat Dorsey outlines the major competitive advantages that give superior companies the power to stay on top.

The four moats discussed are:

  • Intangible Assets
  • Customer Switching Costs
  • The Network Effect
  • Cost Advantages

To read the transcript, click:

Rating: 3.4/5 (9 votes)


Batbeer2 premium member - 4 years ago
Intangible assets are not moats, they are assets.

The fact that your assets are (in part) intangible will not deter your competitors.
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago

They meant things like the CocaCola formula or patents that protect your market but have no specific balance sheet values if developed in house.

DocMoney - 4 years ago

Then refer to these specifically as goodwill, intellectual property etc.
Batbeer2 premium member - 4 years ago
Hi doc,

It's true, many companies have value over and above what is on the balance sheet. KO is a good example. Its most important assets are not on the balance sheet. PEP has similar assets, those assets are on the balance sheet though..... PEP acquired them.

However..... it is not the patents, formulas etc. (on the balance sheet or not) that are the advantage. IMO, they are the result of an advantage.

An example.....

Two companies decide to enter the business of designing jet engines. One is in Omaha and the other is in Boston. The one in Omaha starts out with a number of patents.....

IMO the one in Boston has an advantage for the simple reason that there is a greater supply of capable engineers in Boston. Engineers are a crucial asset in that particular business.

The company In Omaha may look better on paper.... better balance sheet, patents, intangibles, better earnings.... a decade or two from now.... it no longer exists.

The advantage becomes a moat when the city of Boston decides the town has room for only one such business.
DocMoney - 4 years ago

Good points. How about this - if developed in house, goodwill/IP are a result of the advantage but also confer an advantage. If acquired, goodwill/IP confer an advantage.

However, the advantages in question are different. Human capital/culture/leadership are an advantage that can lead to goodwill/IP. But goodwill/IP, even if acquired, are an advantage of their own, just different.
Cm1750 premium member - 4 years ago
Moats are important regardless of whether they are listed on the balance sheet or not.

I remember Buffett saying something that I think about when evaluating a company. To paraphrase:

"If you gave someone $10 billion to invest in a new business, and they refuse to compete against an existing company "X", then company "X" has a strong moat".

Would anyone really use that $10 billion to compete against KO, RSG, PG, V, WMT or PM?
Batbeer2 premium member - 4 years ago
But goodwill/IP, even if acquired, are an advantage of their own, just different.

Hmmmm.... it depends on the price you pay. Buying KO at book, means you are getting something for free. You have an advantage over someone buying a fabless company at book.

You buy KO at 9x book and you are paying a lot for goodwill. You may be better of buying a fabless company at book and investing the remainder in developping its brands/R&D etc.

It does not matter if the buyer is a minority investor or another company buying all shares.

Take cm1750s argument. 10B... no; 50B to take on RSG/BDX.... yes; 500B and I will definately give WMT/V/KO/PG a run for their money.
Batbeer2 premium member - 4 years ago
Don't get me wrong, I like companies with consistent high returns on tangible assets. IMO it is an indication there are barriers to entry. I try to understand what those are and if they are durable.

If I find two companies at similar earnings/FCF yield but one has greater return on tangible assets, that's the one I like best. I ignore the book value of intangibles; what matters is the earnings power of these intangibles. Usually, this has little relation to the book value.

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