Why This Wide-Moat Firm Is Underappreciated
Our research helps identify companies that might not be getting due credit for their economic moats.
Andrew Lane: At Morningstar, we recently published a two-part report series called the Moats and Multiple Series that really aims to provide some useful information to investors. The main idea is that moat ratings can't be solely relied upon to inform investors as to which stocks are likely to outperform or even likely to underperform. And also, the main conclusion is that the width of the moat ratings that we assign, none, narrow or wide, also have a very clear positive correlation with the terminal valuation multiples that are observed across the companies that we cover.
For example, when you consider the midcycle price/earnings multiples that we assign to the companies under our coverage, the median wide-moat company that we cover has a midcycle price/earnings ratio of about 19 and a half times, just below 17 times for the median narrow-moat company, and then just about 14 times for the median no-moat companies. So that shows that positive correlation between the width of a company's moat and, on average, the multiple at which it should be expected to trade in the midcycle environment.
Andrew Lane does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.