# Competitive Advantage



## robusta (28 April 2013)

This definition from Investopedia is probably as good as any;

"An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers than its competition. There can be many types of competitive advantages including the firm's cost structure, product offerings, distribution network and customer support.

Investopedia explains 'Competitive Advantage'
Competitive advantages give a company an edge over its rivals and an ability to generate greater value for the firm and its shareholders. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage.

There are two main types of competitive advantages: comparative advantage and differential advantage. Comparative advantage, or cost advantage, is a firm's ability to produce a good or service at a lower cost than its competitors, which gives the firm the ability sell its goods or services at a lower price than its competition or to generate a larger margin on sales. A differential advantage is created when a firm's products or services differ from its competitors and are seen as better than a competitor's products by customers."

As a long term investor I have been giving this more and more thought lately, if a business can be found with these qualities and the price is reasonable, holding for the long term should work out OK for shareholders.

So with this in mind I thought to create a watch list of ASX listed companies that may have these qualities of particular interest to me would be any small or micro caps. Any contributions and arguments would be greatly appreciated.


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## chops_a_must (28 April 2013)

The problem being, these companies are almost always trading at a premium.

Often at P/Es of over 20.


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## robusta (28 April 2013)

The large end of town is probably the easiest to spot in my opinion;

The big four banks maybe with the exception of NAB so;
CBA
ANZ
WBC

BHP is a difficult one, while they are price takers they have the assets, scale and diversity to have some sort of advantage through the economic cycle.

CSL, Cochlear (COH), Resmed (RMD) and Sirtex (SRX) probably deserve a place in the health care sector. These need to be watched for major changes in technology however. 

Looking to the online space Realestate.com (REA) Carsales (CRZ) both have that network effect happening. Another company I would throw in is Iproperty Group (IPP) this business is still building their network.

Navitas (NVT) seem to have not much competition and nice margins.

IMF seems to have some sort of advantage, they have backed so many winning cases lawyers come to them with strong cases.

So there is a start, many won't agree with all of them but hopefully we can add to this list.


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## robusta (28 April 2013)

chops_a_must said:


> The problem being, these companies are almost always trading at a premium.
> 
> Often at P/Es of over 20.




Very true but that does not mean they will not trade at a more reasonable multiple in the future. Many will find this exercise a waste of time but with patience there may be some opportunity to be found.


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## chops_a_must (28 April 2013)

I bang on about it a bit, but IVC is another one.

It is pretty pricey now though.

TOX is another, off the top of my head.


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## galumay (28 April 2013)

robusta said:


> Very true but that does not mean they will not trade at a more reasonable multiple in the future. Many will find this exercise a waste of time but with patience there may be some opportunity to be found.




For what its worth, i have most of the shares you mentioned on my watch list. 

I quite like the Morningstar approach of assessing the 'moat' a company has, basically same as competitive advantage. 

I guess Woolies/Westfarmers at least have some CA or narrow moat.

The low hanging fruit will be where you can find companies with a CA that havent yet grown to the size to get noticed. Small to mid caps in niche markets with CA and potential growth - i guess thats the holy grail.

Great idea for discussion anyway, Robusta.


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## robusta (28 April 2013)

Cabcharge (CAB) is a business that has not made my list (to the detriment of my returns). They have the network and the infrastructure but I could never convince myself some other epayment system would not steal their business away.


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## chops_a_must (28 April 2013)

CTD and AEU are some others.


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## robusta (28 April 2013)

galumay said:


> For what its worth, i have most of the shares you mentioned on my watch list.
> 
> I quite like the Morningstar approach of assessing the 'moat' a company has, basically same as competitive advantage.
> 
> ...




Cheers you are right it would take a lot of cash to dislodge the market share of WOW and WES I reckon they deserve a spot on the list.

 You are also correct it would be life changing to invest in a REA, RMD, CRZ or CSL soon after listing and hold for the long term.


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## robusta (28 April 2013)

chops_a_must said:


> CTD and AEU are some others.




Thank you I have not had a meaningful look at either of these, I will offer up a opinion once I have researched these guys a bit.


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## galumay (28 April 2013)

chops_a_must said:


> CTD and AEU are some others.




Mmmm...I had a brief look and neither appeared to have significant competitive advantage, but i probably missed the detail.


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## robusta (28 April 2013)

chops_a_must said:


> I bang on about it a bit, but IVC is another one.
> 
> It is pretty pricey now though.
> 
> TOX is another, off the top of my head.




Sorry missed this post IVC is a definite, I guess TOX does not have much competition I will have to look at their business model a little closer however.


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## robusta (28 April 2013)

So before I go to bed we have;
CBA
ANZ
WBC
BHP
CSL
COH
RMD
SRX
REA
CRZ
NVT
IMF
IVC
WOW
WES
With no argument yet.

And in the maybe camp;
TOX
IPP
CTD
AEU
CAB


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## sydboy007 (28 April 2013)

i suppose TLS should be on the list.  They have the money to bash their way through the market.

I'd add RFG and DMP.  They're both on the pricey side but have show a long term ability to grow EPS and have good scale.  DMP has taken to the internet quite well - from memory up to 50% of sales is now done online.

Prob add CPU in there.  Not a great performer lately, but they do have global scale and reach and once the global economy starts growing strongly again they will be very leveraged to it.

CDA would be another company.  They have the tech that puts them in the front globally.  Read an article from a year or 2 ago where they out competed some Chinese company that was selling fake product, but CDA was so good at their manufacturing that eventually the Chinese company signed a distribution deal with them.

SEK prob needs to be on the list too.  They have a stranglehold on the online job market in Australia and are moving internationally now too.

On a Global basis you can try the IOO ETF that invests in the top 100 global companies or the IXI ETF that invests in the top global consumer staples companies.  Pretty much every company in those ETFs has small to large CA.  In some ways I'd say you nearly have to go global to get into the best companies.


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## VSntchr (29 April 2013)

When I think about competitive advantages I usually have a few groups.

The first group contains the obvious ones (most of which have been mentioned).

Another group is companies that I feel are in the midst of building their competitive advantage. How do I identitfy these companies? Looking at their history of margins and returns - is there a story building? Is their a consistentcy/upward trend in excess earnings? Are they pulling further away from the competition? 

Another group is companies which may have had a substantial CA in the past, but are slowly having this eaten away as competition figures out how to take a bigger bite of the pie...

Another source of competitive advantage can be in the pipeline for a long time, and then once a certain agreement is in force - the moat is in place. (think JUMBO acquiring an exclusive lottery license or a biotech acquiring a patent for a successful drug/product)

Then there is companies that can have CA built into their business model. I think McMillian Shakespeare is one of these. They have one half of the business that acts like a cash cow - which allows the other half of the business to load up on debt and leverage excess returns.

I think the best CA's are when their is multiple sources of the advantage. JBH is a bit like this. It had the low cost advantage, but as it lost this advantage due to online retailers being able to easily match and even beat prices by substantial amounts ---the business still survived, and is thus far still somewhat thriving. I think that this is because JBH had more than just a "lowest cost" CA. They marketed themselves well, ensuring that the brand effect was well integrated and has now become another source of competitive advantage.

Some other candidates (other than what I've mentioned) are FLT (scale, brand), CCV (scale, brand, networking), ARP (quality).

I try to ensure that my main watchlist has a large % of companies with competitive advantages to ensure that these are the types of companies I am constantly researching and keeping up to date with. However as has been said, they are often expensive and as such, i find it useful to keep track of other companies in order to try and identify some of those stocks which might just be building new moats


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## ROE (29 April 2013)

If I find such stock I load up over several months - year as cash come in and wouldn't tell anyone -


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## craft (29 April 2013)

ROE said:


> If I find such stock I load up over several months - year as cash come in and wouldn't tell anyone -




At least not until your fully loaded


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## craft (29 April 2013)

Competitive Advantages enablers

*Intangible Assets*
		o Brands (if they allow pricing power)
		o Regulations (lots of small regulations less susceptible to change)
		o Patents etc.

*Customer Captivity*
		o Switching costs
		o Network effect
		o Habits
		o Search Costs

*Cost Advantage*
		o Unique resource, location (Economic rent)
		o Size (relative to niche)


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## odds-on (29 April 2013)

chops_a_must said:


> The problem being, these companies are almost always trading at a premium.
> 
> Often at P/Es of over 20.




Hi Chops,

These companies should be used to create a watchlist for shorting candidates - they will all fail in the long run.

Cheers


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## odds-on (29 April 2013)

ROE said:


> If I find such stock I load up over several months - year as cash come in and wouldn't tell anyone -




You have made a boring day very funny .

Maintain your own competitive advantage.

Cheers


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## craft (29 April 2013)

odds-on said:


> Hi Chops,
> 
> These companies should be used to create a watchlist for shorting candidates - they will all fail in the long run.
> 
> Cheers




They will certainly fall if their competitive advantage is eroded. Not the time to buy them though.


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## McLovin (29 April 2013)

APN 

Owns radio licenses, which have held up the best of all traditional media. Owns the best network of outdoor advertising in Australia, again not easy to replicate. It's hard to tell what's happening in their regional newspaper business but on the surface it does appear to not be as affected by the structural change as metros.


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## ROE (29 April 2013)

odds-on said:


> You have made a boring day very funny .
> 
> Maintain your own competitive advantage.
> 
> Cheers




You sum up nicely
Company competitive advantage + your own advantage = good return 

Have you ever seen Warren Buffett tell people what he's buying ... He even got a sec exemptions not to lodge substantial holding until he fully loaded


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## chops_a_must (29 April 2013)

odds-on said:


> Hi Chops,
> 
> These companies should be used to create a watchlist for shorting candidates - they will all fail in the long run.
> 
> Cheers




You could put the whole market on a watchlist for shorts then.

They wont necessarily fall from where you buy them.

But I'd say you need to be aware of where they are in the growth cycle.

For instance, COH once had market dominance and competitive advantage. Now that it is trading at a lower P/E, does it have the same factors it once did, or has the risk for other competitors taken the fluff out of the price?

None of these companies with a distinct advantage will ever hold that position eternally. High margins, and barriers to entry will eventually reduce.

Just my ramblings..


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## sinner (29 April 2013)

ROE said:


> Have you ever seen Warren Buffett tell people what he's buying ... He even got a sec exemptions not to lodge substantial holding until he fully loaded




and yet, Berkshires 13Fs still provide plenty of alpha on the table if you want to follow along
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=806246


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## sinner (29 April 2013)

Point is, trading the factor is more important than timing the factor.


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## robusta (29 April 2013)

McLovin said:


> APN
> 
> Owns radio licenses, which have held up the best of all traditional media. Owns the best network of outdoor advertising in Australia, again not easy to replicate. It's hard to tell what's happening in their regional newspaper business but on the surface it does appear to not be as affected by the structural change as metros.




This is interesting, not a company I have ever looked at thank you.



sydboy007 said:


> i suppose TLS should be on the list.  They have the money to bash their way through the market.




Many Australians will stick with Telstra no matter what for their telecommunication needs, that is a nice moat.



sydboy007 said:


> I'd add RFG and DMP.  They're both on the pricey side but have show a long term ability to grow EPS and have good scale.  DMP has taken to the internet quite well - from memory up to 50% of sales is now done online.




DMP I agree with totally, RFG however I have never been able to get my head around, the group of businesses are not any I would personally go out of my way to frequent and they also do not have a significant point of difference to their opposition in my opinion.



sydboy007 said:


> Prob add CPU in there.  Not a great performer lately, but they do have global scale and reach and once the global economy starts growing strongly again they will be very leveraged to it.




Scale and ease to deal with probably the main advantages with CPU



sydboy007 said:


> CDA would be another company.  They have the tech that puts them in the front globally.  Read an article from a year or 2 ago where they out competed some Chinese company that was selling fake product, but CDA was so good at their manufacturing that eventually the Chinese company signed a distribution deal with them.




Another one I will have to look inti.



sydboy007 said:


> SEK prob needs to be on the list too.  They have a stranglehold on the online job market in Australia and are moving internationally now too.




You are probably right with Seek but I have allways worried how sustainable their network effect is up against Linkedin.



sydboy007 said:


> On a Global basis you can try the IOO ETF that invests in the top 100 global companies or the IXI ETF that invests in the top global consumer staples companies.  Pretty much every company in those ETFs has small to large CA.  In some ways I'd say you nearly have to go global to get into the best companies.




You are right there are not too many ASX listed companies like Coke, EBAY, AMEX...


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## CanOz (29 April 2013)

McLovin said:


> APN
> 
> Owns radio licenses, which have held up the best of all traditional media. Owns the best network of outdoor advertising in Australia, again not easy to replicate. It's hard to tell what's happening in their regional newspaper business but on the surface it does appear to not be as affected by the structural change as metros.




The price has sure taken a beating McLovin, near all time lows...Looks like bottom might be in for the time being though....

Would love to hear a VSA guru comment on that volume, takeover candidate?

Perhaps i'll post the chart in the stock thread...

CanOz


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## robusta (29 April 2013)

VSntchr said:


> When I think about competitive advantages I usually have a few groups.
> 
> The first group contains the obvious ones (most of which have been mentioned).
> 
> ...






craft said:


> Competitive Advantages enablers
> 
> *Intangible Assets*
> o Brands (if they allow pricing power)
> ...




Two very good posts, perhaps I should break this makeshift list up into those different categories. The best results would probably come from identifying those companies that have the potential to develop a sustainable advantage early in their development.


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## robusta (29 April 2013)

odds-on said:


> Hi Chops,
> 
> These companies should be used to create a watchlist for shorting candidates - they will all fail in the long run.
> 
> Cheers




How long are you talking about odds-on?

SOL seems to be a business that has some sort of advantage (probably shareholder friendly and competent management) they have been around since around 1902, I think BHP may have been around for a while as well.


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## CanOz (29 April 2013)

Has no one mentioned Innovation as a prerequisite to a competitive advantage?

CanOz


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## odds-on (30 April 2013)

Hi Chops,

Not suggesting put the whole market on a watch list, instead look for companies which are widely followed and considered to have a “moat”  with a lot of “fluff” in the price – reverse DCF can be a useful tool to assess the “fluff”. The higher expectations the investors place on a company (and the price) the more likely the “fluff” will disappear when the company fails to meet expectations.

Hi Robusta,

How long? I would start looking at companies that have been widely followed by the investment community for the last 5 to 10 years.

The Big Four banks are currently trading at 2 x book value yet long term CAGR is approx. 12% - does this not concern you? IMO, the drop in interest rates created the chase for safe yield but the Big Four Banks are starting to have some “fluff” in their price.

Cheers


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## odds-on (30 April 2013)

odds-on said:


> Hi Chops,
> 
> Not suggesting put the whole market on a watch list, instead look for companies which are widely followed and considered to have a “moat”  with a lot of “fluff” in the price – reverse DCF can be a useful tool to assess the “fluff”. The higher expectations the investors place on a company (and the price) the more likely the “fluff” will disappear when the company fails to meet expectations.
> 
> ...




Might be of interest...

http://www.smh.com.au/business/banking-share-price-bubble-still-has-way-to-go-20130428-2imp5.html


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## McLovin (30 April 2013)

CanOz]The price has sure taken a beating McLovin said:


> Has no one mentioned Innovation as a prerequisite to a competitive advantage?
> 
> CanOz




Innovation isn't necessarily a competitive advantage unless it can't be copied. Otherwise you're just paying for research your competition otherwise would have to. On the flipside, someone like TEN or SWM doesn't need to innovate to maintain their competitive advantage, the government gives them a license which gives them their advantage.

There was an interesting article in the AFR yesterday about how Samsung and LG basically worked out it was cheaper to steal patents and pay the legal costs and that's how they ruined Japanese manufacturers. 



> A more interesting aspect of the Koreans’ success was their early strategy of forging ahead to make products in competitive markets even if they were impeded by patented technology.
> 
> The areas of technology where Samsung focused its early efforts – DRAM chips, semiconductors and hard disks – were all densely patented, highly commoditised areas of the market.
> 
> ...




http://www.afr.com/p/business/companies/samsung_borrows_without_permission_UZ7o5knqe2TSZuTvw7QYzN


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## robusta (15 June 2013)

Here is a ASX investor talk from one of the Team Invest guys on Competitive Advantages. Gives Cochlear as a good example.

http://www.brrmedia.com/event/frame/112200


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