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By Jeremy Glaser and Heather Brilliant, CFA | 07-10-2013 02:00 PM

Diving Into Economic Moats

We recently launched a dedicated economic moat section in our Premium Stock Analyst Reports.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We've recently launched a dedicated economic moat section in our Premium Stock Analyst Reports. I'm here with Heather Brilliant, the global director of equity research, to talk about the importance of economic moats and the best way to use this new section.

Heather, thanks for joining me.

Heather Brilliant: Thanks for having me, Jeremy.

Glaser: So let's talk a little bit about what an economic moat is. I know it's a term we talk about a lot. But what exactly does it mean? How should investors be thinking about it?

Brilliant: So, we use the term "economic moat" to connote a sustainable competitive advantage. And importantly, an economic moat rating has been available as part of the Premium service for a long time, and what we're really doing now is trying to give investors a little bit more insight into how we arrive at that economic moat rating, or why we think a company has a moat or not. And so, when you read the section, you can really get a deeper sense of, well, why is this company a wide moat or a narrow moat, or even, why doesn't it have a moat? And so, I think that will really enhance the direct applicability of some of the research to the ratings that we've been putting out for some time.

Glaser: So what are some of the structural advantages that a company can have that will give it an economic moat?

Brilliant: Well, there are really five main ways we've identified a company can carve out an economic moat within its industry. And the first would be a cost advantage. So cost advantage is really just the idea that sometimes a company can actually produce something or have a process that results in better efficiency, and produce something at a cheaper cost than its competitors.

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