One of the things that Warren Buffett looks for in a company is a wide economic moat. In many cases, this means that a business enjoys a competitive advantage over rivals due to a high degree of customer loyalty. In such a situation, the company in question may enjoy pricing power over rivals. This can lead to higher margins and profitability in the long run.
With that in mind, here are two shares which could fit the Buffett mould. Both seem to offer wide economic moats due to them having relatively loyal customers. And in the long run they may be able to offer strong growth for investors.
Reporting on Thursday was premium clothing seller Superdry (LSE: SDRY). The company’s share price increased by 10% following news of a rise in global brand revenue of 22.1% in the full year to 28 April 2018. The company’s revenue moved 16% higher to £872m and was led by capital-light channels. Wholesale revenue moved 29.6% higher, with eight new markets reached during the year. And with retail revenue moving 9.2% higher, the overall performance of the company is improving.
The company has been able to increase the strength of its global brand. This has been driven by increasing consumer engagement across digital platforms. It has also innovated through the release of new brands such as Superdry Sport, while a focus on North America and China has yielded strong growth amid favourable trading conditions.
A special dividend of 25p per share was also announced alongside an ordinary dividend of 31.2 per share. Strong cash flow means that the company’s dividend yield of 4.4% could become increasingly attractive. Furthermore, with double-digit earnings growth expected in each of the next two years, a price-to-earnings growth (PEG) ratio of 0.8 suggests that the stock could be undervalued at the present time.
Also offering a wide economic moat as a result of strong customer loyalty is Unilever (LSE: ULVR). The company has built-up a range of dominant brands which are hugely popular across the globe. However, the real growth potential for the business appears to be in the emerging world, which already accounts for the majority of its revenue. With wages set to rise in countries such as China, the company could deliver improving profitability in future years, with it already having a stable track record of positive earnings growth.
While Unilever trades on a price-to-earnings (P/E) ratio of around 21 at the present time, its balance sheet, cash flow and growth potential suggest it may be worthy of a premium valuation versus the FTSE 100. Warren Buffett has stated that he would “rather pay a fair price for a great company, than a great price for a fair company“. With strong growth potential across the emerging world, Unilever seems to be a worthwhile investment for the long term.
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Peter Stephens owns shares of Unilever. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Superdry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.