What is a wide economic moat?
An economic moat is a metaphor that refers to businesses being able to maintain a competitive advantage over their competitors in order to preserve market share and profits. Any method that a company uses to maintain a competitive edge can be considered an economic moat.
A wide economic moat is a type of sustainable competitive advantage possessed by a business that makes it difficult for rivals to wear down its market share. A company with a wide economic moat is regarded as one that can sustain its competitive advantage and have a clear edge over its rivals.
5 types of economic moats
1) Cost Advantage Moat
The company has a cost advantage because the competitors cannot replicate their products. It is one of the most important economic moats.
2) Intangibles Assets Moat
The company can also create an economic moat with the help of intangible assets like patents, trademarks, brand recognition, etc. With this, the company can charge a premium for selling its products in the market compared with its competitors.
3) High Switching Costs Moat
Switching over cost is a disruption cost the customers incur by switching their preferences from one company to its competitors. The disruption cost can be very high for a company’s customers, thus it can be considered as a moat.
4) Size Advantage Moat
When the company’s size is big, it can be an economic moat as the company will be able to achieve the economies of scale with lower input costs.
5) Soft Moats
There are cases when it exists in the company, but it is not easy to identify and describe. This type of moat is known as a soft moat.
5 undervalued stocks with wide economic moats
Here we have identified 5 stocks that we think are undervalued, have a wide economic moat, share our views on which moat the company has, and why we think these 5 companies are ahead of their competitors.
| Company | Ticker | Type of Moat | Share price vs 52week high |
| Alphabet | Nasdaq:GOOGL | Cost advantage | -30% |
| Boeing | NYSE:BA | Intangible assets | -42% |
| Emerson Electric | NYSE:EMR | High switching cost | -17% |
| Amazon | Nasdaq:AMZN | Size advantage | -30% |
| Berkshire Hathaway | NYSE:BRK.A / BRK.B | Soft | -5% |
1) Alphabet (Nasdaq:GOOGL) (cost advantage moat)
Alphabet’s main revenue stream is search advertising which contributes 72% of revenue while the remaining 28% comes from Google Play and Google Cloud. The search advertising revenue arises from the search engine, youtube and google ads.
Google Play includes app store purchases and Youtube Premium while Google Cloud includes Storage, Workspace, Enterprise Android and other APIs.
The company generates a gross profit margin of 57% and an operating margin of 28% and this is because of its size, with about 90% of all internet searches performed on a google platform.
As Alphabet operates Google, one of the most popular search engine and Youtube, the largest online video sharing platform, due to its size and business model, Google is able to provide advertising needs at favourable returns.
Some of its business model such as Youtube Premium which is an add-on type of membership service also provides for high margins.
Due to its functionality and suite of offerings, Alphabet also has a strong Enterprise segment where it cross sells its wide range of products to suit the needs of businesses.
Hence Alphabet’s cost advantage moat comes from its size, market power and also creative offerings and is very difficult to replicate.
2) Boeing (NYSE:BA) (Intangible assets moat)
While Boeing is well known for its Boeing commercial airplanes which used to be the biggest contributor of revenue before COVID-19 struck the aviation sector, it also has a Defence, Space and Security (DSS) segment which has since taken over as the biggest segment and a Global Services segment which is an aftermarket aircraft support segment.
Looking at the chart above, we can see that a Boeing aircraft is made of parts from more than a dozen companies and naysayers would say that Boeing merely a company that assembles parts. It is worth noting that this is a complex manufacturing process where quality is critical to safety and cost efficiency makes all the difference. Boeing has a strong advantage in being able to manage its supply chain and is one of two major commercial airplane manufacturers, the other being Airbus.
With its reputation as an aircraft manufacturer, Boeing is also one of the world’s largest defense and space contractors, developing and producing, commercial and government satellites, human spaceflight programs and weapons. It is worth noting that about 25 percent of its revenues are derived from non-U.S. customers including foreign military sales through the U.S. government.
Boeing’s intangible asset moat comes from his reputation and positioning as one of the two major commercial airplane manufacturers and its track record as a defence and space contractor.
3) Emerson Electric (NYSE: EMR) (High switching cost moat)
Emerson Electric is a global technology leader in automation solutions. It also has a growing commercial & residential solutions segment.
It is a technology and engineering company providing innovative solutions for customers in industrial, commercial, and residential markets. The Emerson Automation Solutions business helps process, hybrid, and discrete manufacturers maximize production, protect personnel and the environment while optimizing their energy and operating costs.
The Emerson Commercial & Residential Solutions business helps ensure human comfort and health, protect food quality and safety, advance energy efficiency, and create sustainable infrastructure.
Its automation solutions provides a full range of services for the entire lifecycle of the project, with services such as process management and fluid control with products such as measurement instruments, valves, regulators and pneumatics. The company serves a wide range of industries such as Oil & Gas, chemical, automotive, mining and medical. Well known key customers include Amgen, BP, BASF, Cargill, Dow, Reliance Industries, Saudi Aramco, Shell, Sinopec and Tesla.
It has a track record of more than 60 complementary acquisitions, such as Rosemount Analytical which offers a range of analysers, transmitters and sensors for chemical measurements and Pentair’s valve and control business which fits with Emerson’s existing portfolio of Fisher branded control vales and regulators and Bettis branded actuators.
As Emerson provides a deep range of products and services to the highest of quality and technical expertise, it is highly disruptive for customers to switch to competitors. There are also not many competitors with the experience in the same space.
4) Amazon (Nasdaq: AMZN) (Size advantage moat)
Amazon is the world’s largest online e-commerce company with nearly half a trillion US dollars in annual revenue. As an e-commerce behemoth, Amazon is bigger than the next 14 largest US retailers combined. While it’s online stores remain the biggest revenue stream, there are many other business segments working in tandem to fuel Amazon’s flywheel.
Although Amazon is an ecommerce tech company, it carries $420 billion worth of assets on its balance sheet of which $216 billion relates to land, buildings, equipment and operating leases. Its vast physical presence includes aircrafts, trucks, warehouses, office buildings, grocery marts.
Aside from its home grown media assets, which include Prime Video, Prime Music and Twitch, and it’s the company’s giant cloud-computing business, which are both valuable, Amazon also has a vast range of products and services stemming from its acquisitions over the years.
For example, it acquired (or is in the process of acquiring) iRobot, One Medical, MGM, Ring, Whole Foods Market, Zoox and Twitch. It has also invested in companies like Rivian. Some of them such as Whole Foods Market and Rivian are complementary to the ecommerce setup while others such as MGM and Twitch are complementary to the broader Amazon flywheel.
Amazon has a size advantage and has put that to good use not only in the ecommerce space where it has built up a significant physical presence to complement its digital presence but has also enhanced its flywheel with its other acquisitions.
5) Berkshire Hathaway (NYSE: BRK.A / BRK.B) (Soft Moat)
Berkshire is a company with a few core and stable businesses and one of the world’s largest investment portfolios.
Berkshire Hathaway’s core businesses in insurance, rail transportation, energy generation and distribution, manufacturing, and retailing. Insurance generates the most revenue, but manufacturing generates the most earnings.
Berkshire’s investment portfolio is followed by millions around the world and contains investments in global companies such as Apple, Coca-Cola, Chevron, American Express and Bank of America.
The company does not pay dividends to its shareholders and profits from its core and stable businesses are positioned for investments. Where investments are complementary to its existing core businesses, it provides a circulatory effect of growth.
The soft moat is because of Warren Buffett’s iconic brand and his ability to acquire strong businesses at good prices that bear fruits in the longer term coupled with his strong investment acumen, even when he is in the stage where he is handing over to a successor, many investors are still investing in Berkshire and following the company’s investments with a very keen interest.
In Closing
Due to the weak market conditions, many of the companies here have seen share prices come down significantly. It is not difficult to find an undervalued investment but it is much more difficult to find an undervalued company with the potential to reap strong returns. Hence, we have provided 5 companies with strong moats that has the potential to do so.
Each of this company has a different moat and its own strengths. We have provided our perspective on which moat each company has, but we can appreciate that everyone has their own views on this topic. Comment and let us know what you think!
