When Warren Buffett looks for prospective investment opportunities, he goes to great lengths to unearth businesses that have ‘economic moats.’ This is a condition or circumstance that puts a company in a favourable position in relation to its competitors, resulting in consistent profits year after year, with little concern that competitors will steal market share.
When it comes to UK companies with economic moats, investor favourites such as Diageo, Unilever and British American Tobacco often spring to mind. These companies own strong stables of brands, enjoy high barriers to entry and generate consistent profits time after time. However for the more adventurous investor, there are plenty of other lesser known UK stocks that have strong competitive advantages over the competition. Here’s a look at two such companies.
When I think of UK property websites, one name comes to mind – Rightmove (LSE:RMV). Indeed, Rightmove is the UK’s largest property portal and last year advertised over one million UK residential properties, more than a third than any other website.
A look into Rightmove’s financials show several clear indicators of a business with an economic moat, including high profit margins and low capital expenditures and research and development costs.
And revenue and earnings have grown at an impressive rate over the last five years, with revenue increasing from £97m to £220m and adjusted earnings per share growing from £0.44 to £1.38 in this time, a compound annual growth rate (CAGR) of a high 26%.
So what about the valuation – is Rightmove priced to buy right now?
City analysts forecast earnings of £1.57 for FY2017, which places Rightmove on a forward looking P/E ratio of 25.5. While this sounds high at face value, it’s probably not unreasonable given Rightmove’s ability to consistently grow its earnings at an impressive clip.
Warren Buffett often argues that it’s better to buy a “wonderful business at a fair price than a fair business at a wonderful price,” although having said that, given that the FTSE has stormed ahead in recent months, it could be a good idea to wait for a market pull-back before starting a position in Rightmove.
You may not know that much about FTSE 100-listed Experian (LSE: RMV) but the chances are it knows something about you, being a global leader in the provision of credit checks.
Experian benefits from limited amount of competition and high barriers to entry, meaning that its economic moat is formidable.
While the company’s growth has not been as prolific as Rightmove’s in recent years, earnings per share have still grown from $0.61 to $0.78 since FY2011, a CAGR of 5%. And analysts expect earnings to jump 17% to $0.91 in FY2017, placing the company on a forward looking P/E ratio of 22.5.
Is it a buy at that price? Experian has a lot going for it, given its economic moat qualities, however given that the shares have risen almost 20% in the last four months alone, I believe a little patience may result in a more attractive buying opportunity in the near future.
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Edward Sheldon owns shares in Diageo. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo and Rightmove. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.