How to use economic moats to increase ROIC

These are some key points taken from the book Why Moats Matter by Morningstar as well as the presentation slides by Morningstar.

A company with a wide mode tends to have higher Return-on-Invested-Capital (ROIC) which is able to sustain for a longer period of time, bringing more value to shareholders over a sustained period of time.

According to Morningstar, there are five areas where firms can develop moats.
  1. Intangible assts:
    1. Brands (LVMH, L'oreal, Tiffany)
    2. Patents (Sanofi, Roche)
    3. Licenses & Government Approvals (Waste Management)
    4. Corporate culture (Berkshire Hathaway)
  2. Switching costs:
    1. Costs of switching exceeds value of benefit (Dassault Systems, Julius Baer Group, Coloplast)
    2. Razor and blade model entrench repeat consumables customers (Waters Corp, ADT Corp)
  3. Network effort:
    1. MasterCard, Visa
    2. eBay
    3. Apple, Google Android
    4. Experian
    5. London Stock Exchange Group
    6. Facebook
  4. Cost advantage:
    1. Economies of scale (ABB Ltd - distribution, Grifols - distribution, Delphi Automotive - manufacturing)
    2. Low-cost resource base (BG Group, Holcim)
  5. Efficient scale: market is limited and only few players exist
    1. Natural geographic monopolies (Airpots, Pipelines)
    2. Niche market with high capital outlay (Defence Companies, Carnival, Alexion)
    3. Rational Oligopolies (Canadian Banks, Australian Banks)

The presentation also talks about the moats present in various industries, which I will not expound on them here.

What is interesting is that Morningstar has a P/ FV (price/ fair-value) indicator to check for over or undervaluation of stocks. They have a screener to assess for various industries. You can check it here, or the bookmark at the right sidebar.

If you wish to access the PDF, you can get it from their website here:×210mm.pdf
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