According to Warren Buffett, a crucial aspect of identifying superior investments involves seeking out companies with sustainable competitive advantages, often described as having "wide economic moats."
In a 2007 letter to Berkshire Hathaway shareholders, Buffett highlighted that a successful company is one with enduring competitive strengths that protect it from the impact of competition. Identifying businesses like these is a key strategy for Buffett in selecting superior long-term investments.
“A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore, a formidable barrier such as a company being a low-cost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success.”
Buffett believes that companies with distinctive advantages can effectively endure competition and are consequently more likely to consistently achieve robust profits, this theory is echoed by academia.
It is apparent that a company with competitive advantages is expected to help it fend off competition and maintain profitability into the future.
Morningstar has identified five sources of moat:
Switching Costs: switching costs gives a company pricing power by locking customers into its unique ecosystem. Beyond the expense of moving, they can also be measured by the effort, time, and psychological toll of switching to a competitor.
Intangible Assets: Though not always easy to quantify, intangible assets may include brand recognition, patents, and regulatory licenses. They may prevent competitors from duplicating products or allow a company to charge premium pricing.
Network Effect: a network effect is present when the value of a product or service grows as its user base expands. Each additional customer increases the products or service’s value exponentially.
Cost Advantage: Companies that can produce products or services at lower costs than competitors are often able to sell at the same price as competition and gather excess profit or have the option to undercut competition.
Efficient Scale: In a market limited in size, potential new competitors have little incentive to enter because doing so would lower the industry’s returns below the cost of capital.
Within the vast expanse of the financial landscape, the MOAT Investment Fund curated by RIOT Investment Society emerges as a beacon of strategic investing, a portfolio of 25 companies, with sustainable competitive advantages.
In the pages that follow, we will reveal the competitive advantages these companies possess over their competitors, and why their market share dominance is likely to endure.
SAUDI ARAMCO
Saudi Aramco is an Arab company, active in the energy sector, founded in 1933 by a concession agreement between the Saudi government and Standard Oil of California.
Over time, this company has managed to develop some competitive advantages over its competitors, which has led it to become the largest oil company in the world.
In this post we will look at some of the competitive advantages that have contributed to making Saudi Aramco the most powerful and influential company in this sector.
Government Support
Saudi Aramco is totally controlled by the Saudi government, this is an extremely significant competitive advantage if you consider that in this way the company can benefit from significant financial and political aid, but also fiscal and bureaucratic benefits. The Saudi government can guarantee important stability to the company, which allows it to dominate the other "big oil" companies.
Abundant Oil Reserves
Another of Saudi Aramco's main competitive advantages is its enormous oil reserves. It manages to produce more than 10 million barrels of oil per day, confirming itself as a leader in the sector.
Investment in technologies
Saudi Aramco continually invests in the use of technological processes, such as horizontal drilling and hydraulic fracturing; these processes allow the company to optimize the extraction of oil from reservoirs to increase efficiency and output.
Investment through Joint Ventures
Saudi Aramco is also known for its joint ventures with major global oil companies. These partnerships allow you to share financial and technological resources, reducing risks and increasing efficiency in the implementation of large-scale projects. The diversification that Saudi Aramco can achieve through this type of investment is one of the reasons why it ranks above other oil companies.
Strategic diversification and globalization
In the years of its expansion, Saudi Aramco has launched diversification and globalization strategies, expanding its business in various countries. Through this geographic diversification, the company gained access to new oil fields and new markets.
Value Chain
The vertical integration that represents Saudi Aramco makes it a key factor of extreme importance, the company is in fact present in all phases of the value chain, from exploration and production to refining and distribution. Through a vertical integration strategy, it allows greater control of costs and operational efficiency.
WHAT DEVELOPMENT PROSPECTS EMERGE FOR SAUDI ARAMCO?
Despite its staggering growth, Saudi Aramco can still expand further.
Diversification of Energy Sources, considering the idea of investing in alternative and renewable energy sources such as solar or wind energy could be a winning solution in the medium to long term.
Focus on Petrochemicals, shifting focus and capital into the Petrochemical sector, using natural gas or crude oil as a raw material, could diversify the company's portfolio, wink at sustainability, and add value through the sale of chemicals and semi-finished.
Environmental sustainability,
Saudi Aramco could focus more on sustainability by increasing investments that contribute to social well-being, reducing greenhouse gas emissions during extraction and cooperating with other companies to reduce pollution.
Investments in Digital Technologies,
Saudi Aramco should continue to invest in advanced technologies such as AI, automation, and data analysis to improve the efficiency of operations, prevent breakdowns, optimize maintenance and even energy use.
CONCLUSION
In conclusion we can say, Saudi Aramco has built its greatness by exploiting the government administration of the state and by relying on competitive advantages such as the vertical integration of its processes.
Continuous investments in digital have brought it a significant return in terms of efficiency, it is a company that remains heavily exposed to fluctuations in oil prices and a strong need to increase its position in the renewables sector in the long term, also in view of the end of oil on the globe.
ALPHABET INC.’S COMPETITIVE ADVANTAGES
Alphabet Inc. is an American multinational conglomerate holding created in 2015 as the parent company of Google and several other companies previously owned by or tied to Google. Google Search is by far the biggest revenue segment of Alphabet.
Since the launch of Google Search in 1997, the company has dominated the global search engine market, generating most of its revenue through advertising. As of 11/2023, Alphabet, Google's parent corporation, boasted a market capitalization of 1.67 trillion U.S. dollars, solidifying its position as one of the largest internet companies globally. Google's services extend beyond search to include email, productivity tools, enterprise products, and mobile devices, contributing to its 2022 revenue of approximately 279.8 billion U.S. dollars.
The company's strategic positioning, innovative prowess, and diverse revenue streams make it a resilient player in the evolving digital world. Even though past performance does not guarantee future results, Alphabet's solid fundamentals and continuous commitment to innovation position is a must-have in a well-diversified investment portfolio.
In conclusion, Alphabet stands as a prime example of how a tech giant can not only dominate its current markets but also proactively build defenses against potential disruptors. For investors looking for a long-term tech investment with a solid moat, Alphabet merits careful consideration.
NOVO NORDISK'S COMPETITIVE ADVANTAGES
NovoNordisk stands out among major global pharmaceutical companies for its unique focus on a specific medical condition. Specializing predominantly in the development of treatments and therapies for diabetes, the company has dedicated its efforts to addressing the complexities of this widespread chronic condition. Headquartered in Copenhagen, Denmark, NVO operates in a country that has emerged as a notable pharmaceutical hub, considering its relatively small size. This Scandinavian company's commitment to diabetes care showcases a distinctive approach within the pharmaceutical industry. As a pioneer in insulin production, Novo Nordisk has played a pivotal role in advancing diabetes management. The company's continuous investment in research & development has led to the creation of cutting-edge insulin formulations, providing patients with more effective and user-friendly options.
While other companies diversify across various therapeutic areas, Novo Nordisk's unwavering commitment allows for a concentrated and specialized effort in addressing the multifaceted challenges of diabetes.
Novo Nordisk boasts a comprehensive portfolio of diabetes products, ranging from traditional insulin formulations to modern, long-acting insulins and innovative non-insulin medications. This diversity not only provides for the varying needs of individuals with diabetes but also fortifies Novo Nordisk against competitors with a more limited scope.
With a strong international presence, Novo Nordisk has successfully expanded its reach across diverse markets. The company's global footprint allows it to adapt to regional variations in diabetes prevalence, healthcare systems, and patient needs, giving it a competitive edge over companies with a narrower market focus.
A careful analysis of the projected trends, as illustrated in the accompanying graph, reveals a continuous and substantial increase in the number of individuals diagnosed with diabetes in the coming years. NovoNordisk, with its longstanding commitment to diabetes care and innovative solutions, is strategically positioned to capitalize on this growing demand. In conclusion, the projected increase in the number of individuals diagnosed with diabetes positions NovoNordisk as a key player in the pharmaceutical industry.
FERRARI’S COMPETITIVE ADVANTAGES
Ferrari’s history began in 1929, when Enzo Ferrari founded the Scuderia Ferrari in Maranello, in the province of Modena. Initially the Scuderia was used as a technical-racing subsidiary of Alfa Romeo and only in 1947 Enzo Ferrari began to produce racing cars under his own brand. In the same year Ferrari won the first of a long series of victories, becoming over time the team with the most successes in the history of Formula 1. Alongside the production of racing cars, Ferrari also began the production of cars for road use, designed for customers passionate about Ferrari cars but not interested in participating in races. Following a major crisis due to the abolition of road racing, Henry Ford II attempted to buy Ferrari, but failed and in 1969 Ferrari became part of the FIAT group, maintaining its autonomy.
What characterizes and distinguishes Ferrari is the competitive advantage it holds against its competitors. It is due to several factors, of which the main one is surely the power of the brand, known all over the world as synonymous of speed, luxury, and success, which lead to associate Ferrari's cars to the word "desire" and therefore justifies the high listing price.
Another fundamental aspect is exclusivity, due to the customization that Ferrari offers to customers, in fact it increases the desirability of the car and the desire to own something unique and prestigious that only a few can afford.
With a capitalization of about 57 billion dollars, higher than that of Volkswagen Group which stands at about 55 billion, Ferrari certainly manages to differentiate itself from its competitors. Its growth is stable and constant over time, as you can see from the chart below Ferrari sales volumes are much less volatile than the entire Luxury Car Industry, thus ensuring the strength and stability of the brand compared to the main competitors.
In addition, it is also interesting to observe, from the chart below, the market share held by Ferrari by geographical area compared to the Luxury Car Industry, which includes Aston Martin, Audi, Bentley, BMW, Ferrari, Ford, Honda/Acura, Lamborghini, Maserati, McLaren, Mercedes Benz, Polestar, Porsche, and Rolls- Royce.
The strength of its brand, the exclusivity of its products and its presence throughout the world guarantee Ferrari a significant competitive advantage over its competitors. Today Ferrari is one of the most performing shares of the FTSE MIB, its MOAT guarantees stable and increasing returns over time, for this reason it can represent a long-term investment to be considered.
STELLANTIS’S COMPETITIVE ADVANTAGES
Stellantis, a multinational holding company, was officially founded in 2021 by the merger of Fiat Chrysler Automobiles and Groupe PSA. Based in Amsterdam, Stellantis controls 14 car brands: Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS Automobiles, FIAT, Jeep, Lancia, Maserati, Opel, Peugeot, Ram Trucks and Vauxhall.
The Stellantis Group was born recently but includes companies already consolidated allowing them to cover a large part of the automotive market.
The large portfolio owned by Stellantis, ranging from more affordable vehicles to luxury cars, allows it to meet the needs of a wide clientele and to have a great competitive advantage over its competitors. The wide range of brands owned, present for a long time on the market, enables Stellantis an internal exchange of know-how and the creation of economies of scale.
Another factor determining its competitive advantage is geographical diversification, which allows society to mitigate political and economic risks. Stellantis also holds a significant market share in the different geographical areas, shown in the image below, which place it fourth in North America, second in Europe, Middle East and Africa and first in South America, thus confirming its dominant market position.
Stellantis is also interesting for its prospects, since 2022 it has launched the "Dare Forward 2030" a plan that aims to electrification and technological innovation by 2030, becoming first in customer satisfaction. The plan also provides for the achievement of double net revenues following the company’s ambition to be "second to none". The transition to electrification will entail an increase in costs that the company plans to offset with new revenue streams from the software sectors and synergies resulting from the merger. Stellantis is therefore ready to ride the automotive market in continuous innovation.
Despite the strong competitive advantage of Stellantis, several factors can make us understand that the stock could be underestimated. One of these is the P/E of 2.97, which is lower than that of competitors, including.
Volkswagen with a P/E of 3.90, Toyota with a P/E equal to 10.11 and Ford with a P/E of 6.80. To date, the price of the Stellantis stock amounts to about 18.60 against an expected average price target of 23.93 and a future P/E of 3.42.
In conclusion we can say that the competitive advantage held by Stellantis thanks to the wide range of products and geographical diversification, along with a possible undervaluation of the stock, make the action worth considering if you want to invest in the long term.
LVMH’S COMPETITIVE ADVANTAGES
Louis Vuitton Moët Hennessy, commonly referred to as LVMH, stands as a distinguished French multinational conglomerate in the luxury goods sector, boasting a portfolio of more than 75 renowned brands, including Louis Vuitton, Dior, Fendi, Givenchy, and Bulgari. The foundation of LVMH's competitive advantage rests upon several pivotal factors: a strong brand portfolio, an extensive distribution network, global presence and focus on innovation and creativity. Bernard Arnault's M&A ventures have propelled LVMH to own some of the best brands globally, making it the largest conglomerate of luxury brands in the world.
Primarily, the major characteristic of LVMH's competitive advantage lies in its formidable brand portfolio, which includes some of the globe's most iconic and instantly recognizable luxury labels.
In this way, LVMH's portfolio of brands allows the company to appeal to a wide range of customers with different preferences and budgets. The company's luxury brands target high-end customers, while more affordable brands, such as Marc Jacobs and Sephora, appeal to a broader audience.
LVMH boasts significant diversification across industries, brands, and geographies. In the unlikely event that its core brands lose relevance, there are numerous backup plans to compensate; if there's a slowdown in one region, the impact won't be severe, given the company's revenue diversification.
Additionally, the company boasts a well-established retail network, spanning department stores, independent boutiques, and online platforms. This network covers the entire globe, exerting a substantial influence in both developed and emerging markets.
The commitment to innovation and creativity is another pivotal aspect of LVMH's competitive advantage. The company is renowned for its capacity to introduce new products that capture consumer attention. Substantial investments in research and development, coupled with collaborations with designers and artists.
LVMH's vertical integration plays a crucial role in its competitive position. Owning much of the manufacturing and supply chain for its brands provides the company with control over product quality and consistency. This integration also enables LVMH to manage costs effectively and respond adeptly to market fluctuations, promoting excellence both upstream and downstream in the value chain.
LVMH's brands are nearly inflation-proof. For instance, a typical luxury shopper need not worry about a 5% inflation LVMH can easily raise prices, which is less damaging than lowering them, the main mission is to preserve the brand's luxury.
KERING’S COMPETITIVE ADVANTAGES
Kering stands as a prominent global luxury group with its roots dating back to 1963. Over the decades, the group has undergone continuous development and expansion, solidifying its position as one of the leading luxury conglomerates in the industry.
In the present day, Kering remains a strong company, the group controls the growth of a portfolio of renowned fashion, leather goods, and jewelry houses. With a notable collection of 13 distinguished brands, including Gucci, Saint Laurent, Bottega Veneta, Valentino, Balenciaga, and Alexander McQueen. This strategic move was followed by the addition of significant brands like: Yves Saint Laurent, Bottega Veneta, and Balenciaga, all falling under the Gucci Group.
Given Kering's ownership of various well-known brands, it emerges as a notable competitor to LVMH. The strength of Kering lies in its diversified presence across different fields and product lines, leather goods, shoes, ready-to-wear, watches, and jewelry. The group emphasizes varied product segmentation, supported by a multi-brand model and vertical integration. Notably, Kering maintains consistent financial performance across its brand, reporting a revenue of 20.35B euros and a net profit of 3.61B euros in 2022.
Portfolio Overview
These are the companies included in the investment portfolio.
Luxury and Consumer Goods Sector:
Kering
LVMH
Stellantis
Ferrari NV
Gaming and Entertainment Sector:
Evolution Gaming
Nintendo ADR
Technology Sector:
ASML
Amazon
Sony
Alphabet
Apple
Alibaba
Tencent
Payments and Financial Services Sector:
Paypal
Construction and Building Sector:
Builders FirstSource, Inc.
Louisiana-Pacific Corporation
Chemical Sector:
Celanese
Maire Tecnimont
Transportation - Railways Sector:
Union Pacific
CSX
Canadian National Railway Company
Food and Beverage Sector:
Coca-Cola
Pepsi
Cal-Maine
McDonald’s
Pharmaceutical Sector:
Novo Nordisk
Oil Sector:
Saudi Aramco
Financial Services:
JPMorgan
BlackRock
PingAn
CME
Due to the price of the market, initially, the portfolio allocation will be 60% in stocks and 40% in short-term bonds.
The weights of stocks in the portfolio may undergo changes during updates, and there is a possibility of introducing additional stocks over time.
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