ASX INVESTMENT TALKS

Transcription

1 ASX INVESTMENT TALKS Economic moats which companies have them? SPEAKER: Andrew Page, Facilitator, Team Invest LOCATION: Sydney DATE: May 2013 DISCLAIMER: The views, opinions or recommendations of the presenters are solely their own and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN and its related bodies corporate ( ASX ). Information and material presented at the seminar is for educational purposes only and does not constitute financial product advice. Investors should obtain independent advice from an Australian financial services licensee before making investment decisions. No responsibility is accepted by ASX for any loss or damage arising in any way (including due to negligence) from anyone acting or refraining from acting as a result of this information or material. Copyright 2013 ASX Operations Pty Limited ABN All rights reserved 2012.

2 Outline What is an economic moat? Why they matter Types of moat Evidence of moats Not all moats are created equally

3 What is an Economic Moat? A durable, competitive advantage Allow a company to outperform its competitors in terms of profitability Can acts as a barrier to entry for competitors

4 Why it matters Competitors will notice anything that yields greater margins and returns and will seek to emulate Without some durable competitive advantage, market share can be eroded and margins can be squeezed

5 "The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors. Warren Buffett

6 Types of Economic Moat There are 4 broad categories: Cost advantage Intangible assets Network effect Trap-door

7 Cost Advantage Can provide their product or service at a lower cost than competitors Economies of scale Supplier relationships Market dominance Manufacturing advantage

8 Cost Advantage Example: Woolworths Ltd Cost advantage with supplier agreements Economies of scale with back office operations & logistics supply network Difficult for most to compete on price

9 Woolworth s ROE

10 Woolworth s NPM

11 Woolworth s EPS

12 Intangibles Certain types of intangibles can act as a strong barrier to entry Patents Licenses Contracts Brand Names / reputation

13 Intangibles Example: CSL Ltd Products protected by patent Example: Coca-Cola Ltd, Apple Brand name strength

14 CSL Ltd NPM & ROE

15 CSL Ltd - EPS

16 Network Effect When demand for a company s products or service are strengthened as more people use it Example: Ebay, Carsales.com, Realestate,com

17 REA - ROE

18 REA - Sales

19 Trap Door Refers to any situation where switching to a competitor is costly, difficult or bothersome EG RKN, CBA

20 RKN NPM & ROE

21 RKN - EPS

22 Not all moats are equal WEAK MOATS Contractual Reputational / brand STRONG MOATS Trap door Network effect Economies of scale Great management is not a moat!

23 Evidence of Moats Large Market Share High and consistent ROE / margins Ability to increase prices ahead of inflation

24 Testing for moats What would be the impact to sales if prices were lifted 10%? Have margins and profitability remained high and steady over many years? Have they been improving? Has the entire industry expanded? Commodity products

25 What if there are lots of moats? Consider Cochlear (COH) Patents Network effect (network of clinicians and surgeons) Trap door (recipients unlikely to switch) Scale (unit costs are lower due to scale)

26 COH - NPM

27 COH - ROE

28 Summary Companies with strong and durable moats offer the most certainty in terms of earnings performance and hence long term returns Posses fewer risks for investors Companies with few or no moats can experience sudden and significant changes in fortune

29 Disclaimer This Information Session is presented by: Teaminvest Pty Ltd ABN AFSL None of the material presented should be construed as constituting personal investment advice or stock recommendations and the material used and views expressed should be perceived as being for educational and discussion purposes only. You should undertake your own due diligence and satisfy yourself in relation to the material presented and the products and service offered by Teaminvest. Please be aware that the presenter may own shares in one or more of the companies discussed.

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