Seven New Wide-Moat Firms
These companies have strong, sustainable competitive advantages.
These companies have strong, sustainable competitive advantages.
Over the past few months, our staff of analysts has initiated coverage on many companies not previously covered by Morningstar. In addition, we've fine-tuned our economic-moat ratings for some companies previously rated as narrow moat, upgrading a few of these to wide-moat status.
We’re always on the lookout for new companies with wide economic moats because these companies generate economic profits year after year. As such, their intrinsic values rise over time--they’re "compounding machines."
The result: We’ve found some new wide-moat companies. Below are seven of them, with excerpts from each firm’s Analyst Report as it appears on Morningstar.com.
Iron Mountain (IRM)
Analyst: Fritz Kaegi
Iron Mountain stores paper, film, and digital materials for 150,000 clients in the United States, Europe, and Latin America. The bulk of Iron Mountain's revenue comes from physical storage--paper and film records--and ancillary services like retrieval, delivery, and shredding; storage of digital information accounts for the rest.
How in the world could a business that consists of building warehouses and stuffing boxes into them have a wide economic moat? Because this business has switching costs, pricing power, and substantial barriers to entry. Read the full Analyst Report.
Cadbury Schweppes PLC ADR (CSG)
Analyst: Mark Hugh Sam
We have assigned a wide-moat rating to Cadbury because of the strength of its niche in the beverage business as well as its brands in confectionery. Additionally, we think the stock sells at an attractive price. Cadbury owns a global distribution network and many powerful brand names, which are the keys to making sweet money in the candy trade. The acquisition of Adams helped Cadbury garner $6 billion of candy and gum sales in 2003, vaulting it to the number-one position in the $100-billion worldwide confectionery market. Unlike its competitors, Cadbury boasts strong brands in all confectionery segments: Cadbury in chocolate, Halls and Trebor in sugar candy, and Trident and Dentyne in gum. In addition, the firm owns a slew of strong regional and local brands. It holds the number-one or number-two confectionery position in 24 countries, including the United Kingdom and France. Confectionery accounts for roughly 50% of the company's sales and profits.
The other half of Cadbury's sales and profits comes from its strong niche in the beverage market (mostly in the United States). Read the full Analyst Report.
CH Robinson Worldwide (CHRW)
Analyst: Nicolas Owens
CH Robinson has been brokering cargo shipments across the United States for almost 100 years, but that isn't what makes the company great. Robinson's competitive strength lies in its network of relationships with shippers and truckers.
When a customer calls to arrange a shipment of cargo, Robinson matches the cargo with truck capacity available to move it. Robinson's customers include shippers in the food and beverage, paper and printed material, manufacturing, and retail industries.
Robinson competes on some routes with small mom-and-pop operations that have built up local expertise in specific trucking lanes. While such operations are often profitable, they cannot match the scale of Robinson's network, which contains more than 150 offices worldwide, most of those blanketing the United States. Robinson's ability to match shippers' needs with truckers' capacity and availability makes for the company's wide moat. Read the full Analyst Report.
Renaissance Re Holdings (RNR)
Analyst: Dreyfus Neenan
Renaissance Re ("Ren Re") is the creme de la creme of reinsurance. Proprietary underwriting models, profit-driven risk selection, and capital-saving joint ventures endow a wide moat and high returns on capital.
Ren Re’s wide moat comes from its highly technical and proprietary underwriting models. The firm strives to develop deep insight into catastrophe risk, then selectively employs this knowledge in markets offering the highest returns because of inefficient pricing.
Ren Re's models and technical approach are critical, and the firm endeavors to ensure they are the industry's best by continually updating them with new proprietary software, loss experience, and industry data. The models allow underwriters to assess the incremental return on equity and capital requirement of each new contract, allowing Ren Re to accept or reject business on that basis. Read the full Analyst Report.
Stericycle (SRCL)
Analyst: Sanjay Ayer
Stericycle dominates the fragmented medical-waste industry, with a 22% share and revenue that's 17 times greater than the number-two player. Even though the industry offers attractive economics (Stericycle sports operating margins of 28%), we don't expect any legitimate contenders to emerge. Public opposition makes it cumbersome for companies to obtain permits to build new treatment facilities, where waste is rendered noninfectious before it's disposed of. Stericycle's 42 treatment facilities, therefore, constitute an enormous competitive advantage. The firm also has contracts and entrenched relationships with 300,000 customers. In this highly regulated industry, Stericycle's service network and infrastructure would be difficult and expensive to replicate.
Recent regulations have made treating waste in-house more costly for Stericycle's customers--mainly health-care providers such as hospitals, blood banks, and doctors' offices. Read the full Analyst Report.
Teva Pharmaceutical Industries ADR (TEVA)
Analyst: Elizabeth Bernstein
Teva has the drug industry's largest generic pipeline, and its marketed generics will continue to be its main growth driver. With a pipeline of 112 abbreviated new-drug applications equating to $68 billion in branded-drug sales, we expect 20% annual growth through 2008.
In addition to having a stellar legal team that uncovers and wins generic opportunities, Teva has acquired its way to leadership in key drug segments. Acquisitive growth often wastes shareholder value, but Teva has used its purchased distribution to expand its own product sales, so these transactions add to the top and bottom lines. Read the full Analyst Report.
Weight Watchers International (WTW)
Analyst: Fritz Kaegi
Weight Watchers International is the world's leading provider of weight-loss services, operating in 30 countries through a network of company-owned and franchise operations. Low-carbohydrate diets (like Atkins) have recently dented the firm's growth, because they use a different approach and have benefited from heavy press coverage. But over the long term, we don't think these diets are threats. The company has weathered many diet fashions in the past and has consistently emerged unscathed. If these diets actually portend a permanent shift in tastes or habits--or if they get more scientific backing--Weight Watchers can always fold low-carb guidelines into its meetings. Whatever course nutritional tastes follow in coming years, Weight Watchers can mimic them and still add value through its meetings.
The firm has been around since the 1960s and is quite profitable, yet it has no major peers when it comes to group-based educational weight-loss programs. True, women (who are 95% of attendees) can look to some rough substitutes--self-help, friends, group-oriented exercise programs (such as those offered by Curves, a franchised, no-frills gym for women), or programs selling their own line of food products (such as Jenny Craig). These substitutes give Weight Watchers little power to increase its meeting fee. But more than 95% of American women recognize the Weight Watchers brand, and many trust it. No firm has successfully replicated Weight Watchers because it is too expensive to create a brand that generates sufficient attendance at regular meetings in disparate locations. Read the full Analyst Report.
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