In our view, good businesses have competitive advantages. They're tough to beat whatever market they're in; they've carved out moats that should allow them to generate excess returns for the next decade.
Great businesses, meanwhile, have unassailable competitive advantages--they have wide moats that should allow them to generate excess returns for the next two decades.
And the best businesses are those wide-moat firms are strengthening their existing competitive advantages and are run by adroit capital allocators.
Finding the best businesses by this definition means zeroing in on firms that do well on three particular Morningstar metrics: they have wide economic moats, positive moat trends, and exemplary stewardship ratings.
The five businesses included here have hit the trifecta. Their stocks may not all trading in buying range today, but they should certainly be on investors' watch lists.
Data is through June 14, 2018.
Ambev (ABEV)
Morningstar rating: 4 stars
Discount/Premium Price/Fair Value: -17%
Uncertainty: Medium
The largest brewer in Latin America by volume and the fourth largest beer producer worldwide earns a wide economic moat thanks in part to its superior economies of scale compared to its peers. Moreover, its moat trend is positive, says sector director Phil Gorham, because that cost advantage will only strengthen over time, given the growth trajectories of the industry. In fact, we expect returns on invested capital to rise from about 25% over the past three years to the mid-40s in the medium term.
"Ambev is in one of the strongest positions among alcoholic beverage companies to exploit the volume growth opportunities in its core markets," he says.
In addition, Ambev is managed by a team of exceptional stewards of shareholder value.
"Through a series of acquisitions and a focus on cost-cutting, the company has fortified its wide economic moat and generated impressive returns to the company's shareholders," notes Gorham in his latest report. "Over the past decade, Ambev's shareholders have enjoyed double-digit annualized total returns."
Gorham says management sets aggressive sales and volume goals and works diligently to squeeze out unnecessary costs. Most of the brewer's senior managers have been around since the 1990s.
BlackRock (BLK)
Morningstar rating: 4 stars
Discount/Premium Price/Fair Value: -13%
Uncertainty: Medium
The largest asset manager in the world, wide-moat BlackRock differentiates itself from its competitors with its scale, ability to offer active and passive products, institutional focus (where assets are stickier), strong brands (iShares among them), and reasonable fees.
"The size and scale of its operations, the strength of its brands, and the diversity of its AUM by asset class, distribution channel, and geographic reach provide it with a leg up over competitors," says sector strategist Greggory Warren in his latest analyst report.
Moreover, we assign BlackRock a positive moat trend, thanks in large part to its iShares ETF platform. Morningstar expects the ETF market to grow at a 10% to 14% annual rate over the next five years, notes Warren, with BlackRock maintaining its lead domestically and abroad.
Warren calls CEO Larry Fink's management "exceptional," noting that Fink and his team have an outstanding record of capital allocation.
"In an industry where acquisitions have not always worked out, he has overseen not one but two major deals--Merrill Lynch Investment Management (2006) and Barclays Global Investors (2009)--that not only transformed BlackRock's business but turned it into the largest asset manager in the world with the widest economic moat in our asset-management coverage," he says.
Warren also likes the way the firm is expanding its senior ranks and grooming potential successors.
CoStar Group (CSGP)
Morningstar rating: 2 stars
Discount/Premium Price/Fair Value: +30%
Uncertainty: High
A leading provider of commercial real estate data, wide-moat CoStar is, according to analyst Brad Schwer, building a real estate services empire.
"CoStar continues to build its economic moat in the real estate services industry," he explains in his latest analyst report. "Through its decades of research and deep investment in providing necessary data to its users, the company is decades ahead of its small and fragmented competition. The stickiness of its customers, with their 90%-plus renewal rates (closer to 97% for those who have been subscribers for several years), allows management to pass along subtle annual price bumps for its data platform, providing consistent top-line growth."
The company's moat trend is positive, as the company continues to increase its coverage, which only widens the gap between it and its fragmented competition. Schwer also sees plenty of room for further growth, because CoStar is only 30% penetrated in its target market for apartments, 15% penetrated in the broker community, and 7% penetrated with institutional investors.
Led by founder and CEO Andrew Florence, management earns an Exemplary stewardship rating.
"The company has delivered incredible value to its shareholders in recent years and has made numerous acquisitions that made competitive and financial sense," says Schwer. In addition to these successful acquisitions, organic growth has been the main driver over the past 20 years, and management has invested heavily to build a data powerhouse.
Starbucks (SBUX)
Morningstar rating: 4 stars
Discount/Premium Price/Fair Value: -16%
Uncertainty: Medium
No doubt Howard Schultz's recently announced departure from the wide-moat coffee purveyor raises questions, admits sector strategist RJ Hottovy. But we're confident about the company's long-term prospects, and therefore have maintained our wide moat, positive moat trend, and exemplary stewardship ratings for the firm.
Hottovy notes that nonexisting switching costs, intense competition and low barriers to entry make it tough for restaurants to establish competitive advantages and thereby moats. Starbucks is an exception.
"With a brand intangible asset that commands premium pricing combined with meaningful scale advantages, we believe Starbucks possesses a wide economic moat," he explains in his latest analyst report. "We expect the company to maintain its specialty coffee leadership while successfully finding new growth avenues."
Notably, Starbucks is only starting to scratch the surface of its long-term channel and geographical growth potential, says Hottovy. He's particularly optimistic about mobile, digital, and loyalty-program synergies; partnerships with the likes of Spotify and Lyft; new payment technologies; and the firm's undeniable international opportunities, especially in China, India and Japan.
On the management front, Starbucks is in an enviable position.
"We still consider Starbucks to have one of the deepest benches in the consumer industry," says Hottovy. "As such, we expect that the company's key growth objectives will remain on track in the years to come."
Moreover, management has done a good job acquiring high-growth potential projects while still returning cash to shareholders.
VF Corp (VFC)
Morningstar rating: 3 stars
Discount/Premium Price/Fair Value: +11%
Uncertainty: Medium
The wide-moat apparel-maker boasts a portfolio of leading lifestyle brands, including The North Face, Timberland, Vans, Lee, and Wrangler. The firm manages its brands well and maintains pricing power, thanks to its intangible brand assets. VF continues to snatch market share, notes senior equity analyst Dan Wasiolek.
"We believe management's ability to cull declining brands, nurture growing brands, and acquire strong brands will continue to support a portfolio of names worthy of a wide moat," notes Wasiolek in his latest analyst report. "We believe the company bases its acquisition strategy and brand positioning on intense consumer research and reviews its brand portfolio annually to divest itself of any brands that do not make strategic sense for the overall portfolio. In our view, these two practices will ensure that the overall VF brand intangible asset will remain strong over a significant period, as the brands and products it owns will be adjusted to maintain value."
Leadership's brand-management adeptness should keep VF's competitive advantages growing--and we therefore award the firm a positive moat trend. Organic investments should strengthen the existing brand portfolio, too, adds Wasiolek. He expects gross margin expansion to continue, with margins exceeding 50% in the next five years.
In addition to smart brand management driving shareholder returns, the leadership team has been willing to return excess cash to shareholders through a growing dividend. Wasiolek notes that VF has generated an average annual total shareholder return of 17% versus the S&P 500’s 16% return.
Susan Dziubinski does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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