Jason Stipp: I'm Jason Stipp for Morningstar. As Morningstar stock analysts expand our coverage over into Europe, we are having some new wide moat companies join our roster. Here with me to tell us a little bit about two of those companies is Morningstar's Paul Larson. He is an equities strategist and also the editor of Morningstar StockInvestor. Thanks for joining me Paul.
Paul Larson: Thanks for having me again.
Stipp: So these companies, they're ones that we recently put under coverage, it is not like they just recently dug their moats. They probably had wide moats for a while. But we started to cover them, and so they have joined our wide moat rolls. So tell us a little bit about the first company. You mentioned something to me very intriguing before we started the interview about what this company does. Tell us a little bit about it and why it has a wide moat.
Larson: The company's name is De La Rue, and we often use the metaphor that this company is printing money. Well, here is a company that actually prints money. This company prints bank notes for smaller countries around the world.
Here in the U.S., we are used to the government actually printing our greenbacks here. But in many smaller countries, they actually outsource this function. And this particular company is one of the very small number of companies that actually prints bank notes.
Stipp: So it sounds like an interesting business, but what gives it a wide moat? What makes it hard for competitors to come in on that?
Larson: Well, as you might imagine, this is not a function that a country is just going to give to any old printer. You have to have a level of trust built up, and De La Rue certainly has that. You also have to have the technology to be able to thwart counterfeiters, and De La Rue also has that.
And once a country is going with a given provider, they tend not to switch a whole lot. And so, there are high barriers to entry, some customer switching costs. And between those two things, those are the sources of the moat.
Stipp: Sounds like a very interesting idea. What does it look like from a valuation perspective?
Larson: The valuation, unfortunately, like a lot of wide moat stocks, this one looks like it is roughly fairly valued. It trades on the London Exchange. In terms of pence, our fair value is 910, and that is versus a stock price near 940 today.
Stipp: The second company may be one that is a little bit more familiar to some people. They may have heard of it before, or used its services. And it is in the credit space. Tell us a little bit about that and why it has a wide moat.
Larson: The name is Experian, and this is one of the three major credit database companies in the world. This one, like De La Rue, is based in England, but they are worldwide and they are one of the three major credit database sources. Like a lot of database companies, this is a high-profitability business, and there are some significant barriers to entry because they have all these billions of data points in their database that would be insurmountably large to reproduce since they have been gathering this data for many, many decades.
Stipp: Now, you did mention that there are a couple of rivals in this space. Would you say that the three of them together have cornered the market in this area?
Larson: Absolutely. It is one great exhibit of a oligopoly. And it is interesting, too, that a lot of financial firms, when they do pull a potential borrower's credit, they will pull the credit rating from more than one agency. So it is not necessarily a choice of choosing one over the other. A lot of times, they will pick more than one.
Stipp: So it sounds like an interesting idea. I am hoping you have a little bit better news for me on the valuation front on this one.
Larson: Yes. The valuation is more interesting than what we have at De La Rue. In terms of pence, our fair value estimate is 827 versus the current price of right around 650.
Stipp: So it sounds like it could be an interesting idea. Now, you mentioned that these companies are traded on the London Stock Exchange. As an individual investor here in the U.S., how might I get access to them?
Larson: Thankfully, both of these do trade on the pink sheets. Now, when you do buy a pink sheet stock, you are giving up some liquidity because these are relatively illiquid securities. But the good thing is that they are relatively easy to buy.
When you translate the fair values and prices into dollars, De La Rue, our fair value estimate would translate to just under $14 and the current stock price is about 14 and a half. On Experian, our fair value estimate would translate to $12.60, and that is versus a stock price of just under $10.
Stipp: Well, it sounds like certainly one for the radar and maybe one to consider picking up. Thanks so much for joining me Paul.
Larson: Thanks for having me.
Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.