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By Jeremy Glaser and Paul A. Larson | 12-19-2012 12:00 PM

New Year, New Moat Ratings for These Stocks

Competitive advantages improved for one health-care firm, while a spin-off at another narrowed its moat, says Morningstar's Paul Larson in his discussion on recent moat-rating upgrades and downgrades.

Editor's Note: Since the filming of this video, Morningstar equity analyst Matthew Coffina was named editor of Morningstar StockInvestor

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We spend a lot of time here talking about economic moats, or long-term competitive advantages. I'm here with Paul Larson. He is the editor of Morningstar StockInvestor. He is our chief equities strategist, and he is also in charge of our economic moat research. We are going to look at a few new firms that have been recently given the wide-moat rating and a few that have lost it.

Paul, thanks for joining me today.

Paul Larson: Thanks for having me.

Glaser: Let's start with the additions to the wide-moat cohort. What's the first one?

Larson: One company that we recently upgraded to a wide economic moat rating is Rockwell Automation. And what this company has, is they have a platform that basically controls a lot of the automation that happens at factories. And once a factory gets on the Rockwell platform, there are very significant switching costs to go from one platform to another. So, once they have this platform, they tend to stick with it for a long period of time, and that gives Rockwell some fairly significant pricing power.

And another thing to consider is that the automation within a factory is a relatively small cost of the overall cost of running a factory. So, that also gives this company some pricing power. But the proof is really in the pudding when you look at the returns on invested capital. They're very safely above the cost of capital for this company and have been for a number of years. And that's a situation that we expect to continue relatively far into the future.

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