We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
What is an “economic moat?” A term widely popularized by Warren Buffett; it describes a business’ unique competitive advantage. Moats function to protect long-term profits. They come in many forms such as geographical location, technological edge, and brand among others.
The simplest example of a moat is a geographical one. Something like a port, used for shipping and trade is a very powerful competitive advantage. Businesses that own a port have the distinct advantage of a geographical monopoly. If someone wants to move freight over water and do so through that location, they have no other option than to do so though the business’ port.
Another way of defining a moat is a monopoly. The competitive advantage for some reason or another makes it is incredibly hard if not impossible to knock the incumbent from their dominant position.
Below I cover two stocks for investors to consider each with its own distinct moat.
Otis Worldwide
Otis Worldwide (OTIS - Free Report) is one of the leading elevator and escalator manufacturing, installation, and service companies in the world. The company operates in two segments, New Equipment and Service. The New Equipment segment designs, manufactures, sells, and installs a range of passenger and freight elevators, as well as escalators. The Service segment performs maintenance and repair services, as well as modernization services to upgrade elevators and escalators.
OTIS was originally founded in the 1800s before it was acquired in the 1970s. Otis was most recently spun off as its own company in 2020. The elevator business is no longer a rapidly growing industry, but because of its dominance, difficulty of entry, very long-term business contracts, and competitive advantage Otis is a very appealing stock.
The moat for Otis Worldwide is multipronged. The elevator business has many barriers to entry. Building elevators is extremely capital intensive, complicated. There is also some liability risk involved considering how devastating an elevator related accident can be. Otis, as one of the oldest and largest producers of elevators, is the most recognizable name in the industry. So it has a technological advantage in the actual production, and a branding advantage as the most reputable name in the business.
Additionally, elevators are installed and left in buildings for very long periods of time, decades usually. So long as a building stands there is no reason to change elevators. This provides the next competitive advantage, which is the very extended contracts. Elevators require regular maintenance and repairs, and who better to do so than the people that built them. These cashflows exist so long as the building functions and uses its elevators.
With slowdowns in the economy likely on the horizon, OTIS sales forecasts are expecting a near-term slowdown in growth. Current quarter sales are expected to decline -4% to $3.3 billion, but are expected to reaccelerate as next quarter, current year and next year sales are expected to flip back to growth. Earnings expectations are expected to follow the same path.
Image Source: Zacks Investment Research
Otis is currently trading at a one-year forward earnings multiple of 24x, which is below its three-year median of 26x. OTIS also offers a dividend yield of 1.4%, which it has raised by an average of 20% annually for the last three years.
Image Source: Zacks Investment Research
Disney
Media and amusement park conglomerate Disney (DIS - Free Report) has a particularly unique and powerful economic moat. Disney, is of course, known for its media franchises, studio capabilities, parks and direct to consumer streaming app, Disney+.
Disney’s brand is known around the world, and it is thanks to its brilliant flywheel. Children watch Disney movies and become familiar with characters, series, and movies. Their parents bring them to the parks where they have the time of their lives on rides while also meeting the characters from movies. Then they go home and watch Disney content, more connected to the characters than ever. When they grow older and have children of their own the cycle starts again.
Disney is creating content for the adults now too. With Marvel and Star Wars franchises, DIS can entertain the whole family. There are few if any businesses that have connected to people the way Disney has, and that recognition, and those timeless stories and characters are its economic moat.
Disney has been publicly traded since 1962, and its returns since then are astronomical. DIS stock has returned some 80,000% since 1962, which is 20% annualized over 60 years. Over the last 20 years, the performance has been strong as well, but a bit slower than the early years, compounding at about 10%.
Image Source: Zacks Investment Research
Disney currently hold a Zacks Rank #3 (Hold) as the near term earnings estimates have been revised lower. It should be noted that both next quarter and next year have been revised higher recently.
Current quarter sales are expecting to climb 15% higher, while earnings are projected to drop -13%. Looking farther out all other projections look promising. Next year sales are expected to grow 7%, and earnings are expected to jump 36%.
Image Source: Zacks Investment Research
After the release of Disney Plus, along with the mania that followed the Covid pandemic, Disney was bid up to unreasonable levels. Since then the stock has corrected over 50%, and valuations have become more reasonable. Disney is trading at a one-year forward earnings multiple of 23x, which is above its 10-year median of 19x.
Image Source: Zacks Investment Research
Conclusion
Protect your profits and protect your portfolio with stocks that have significant competitive advantage. Of course, that isn’t always the simplest thing as even stocks with considerable moats deal with periodic mismanagement, and deep drawdowns. These are stocks that should be held for the long term, and you really have to understand what the competitive advantage is, and make sure it is maintained.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
2 Stocks to Buy with Strong Economic Moats
What is an “economic moat?” A term widely popularized by Warren Buffett; it describes a business’ unique competitive advantage. Moats function to protect long-term profits. They come in many forms such as geographical location, technological edge, and brand among others.
The simplest example of a moat is a geographical one. Something like a port, used for shipping and trade is a very powerful competitive advantage. Businesses that own a port have the distinct advantage of a geographical monopoly. If someone wants to move freight over water and do so through that location, they have no other option than to do so though the business’ port.
Another way of defining a moat is a monopoly. The competitive advantage for some reason or another makes it is incredibly hard if not impossible to knock the incumbent from their dominant position.
Below I cover two stocks for investors to consider each with its own distinct moat.
Otis Worldwide
Otis Worldwide (OTIS - Free Report) is one of the leading elevator and escalator manufacturing, installation, and service companies in the world. The company operates in two segments, New Equipment and Service. The New Equipment segment designs, manufactures, sells, and installs a range of passenger and freight elevators, as well as escalators. The Service segment performs maintenance and repair services, as well as modernization services to upgrade elevators and escalators.
OTIS was originally founded in the 1800s before it was acquired in the 1970s. Otis was most recently spun off as its own company in 2020. The elevator business is no longer a rapidly growing industry, but because of its dominance, difficulty of entry, very long-term business contracts, and competitive advantage Otis is a very appealing stock.
The moat for Otis Worldwide is multipronged. The elevator business has many barriers to entry. Building elevators is extremely capital intensive, complicated. There is also some liability risk involved considering how devastating an elevator related accident can be. Otis, as one of the oldest and largest producers of elevators, is the most recognizable name in the industry. So it has a technological advantage in the actual production, and a branding advantage as the most reputable name in the business.
Additionally, elevators are installed and left in buildings for very long periods of time, decades usually. So long as a building stands there is no reason to change elevators. This provides the next competitive advantage, which is the very extended contracts. Elevators require regular maintenance and repairs, and who better to do so than the people that built them. These cashflows exist so long as the building functions and uses its elevators.
With slowdowns in the economy likely on the horizon, OTIS sales forecasts are expecting a near-term slowdown in growth. Current quarter sales are expected to decline -4% to $3.3 billion, but are expected to reaccelerate as next quarter, current year and next year sales are expected to flip back to growth. Earnings expectations are expected to follow the same path.
Image Source: Zacks Investment Research
Otis is currently trading at a one-year forward earnings multiple of 24x, which is below its three-year median of 26x. OTIS also offers a dividend yield of 1.4%, which it has raised by an average of 20% annually for the last three years.
Image Source: Zacks Investment Research
Disney
Media and amusement park conglomerate Disney (DIS - Free Report) has a particularly unique and powerful economic moat. Disney, is of course, known for its media franchises, studio capabilities, parks and direct to consumer streaming app, Disney+.
Disney’s brand is known around the world, and it is thanks to its brilliant flywheel. Children watch Disney movies and become familiar with characters, series, and movies. Their parents bring them to the parks where they have the time of their lives on rides while also meeting the characters from movies. Then they go home and watch Disney content, more connected to the characters than ever. When they grow older and have children of their own the cycle starts again.
Disney is creating content for the adults now too. With Marvel and Star Wars franchises, DIS can entertain the whole family. There are few if any businesses that have connected to people the way Disney has, and that recognition, and those timeless stories and characters are its economic moat.
Disney has been publicly traded since 1962, and its returns since then are astronomical. DIS stock has returned some 80,000% since 1962, which is 20% annualized over 60 years. Over the last 20 years, the performance has been strong as well, but a bit slower than the early years, compounding at about 10%.
Image Source: Zacks Investment Research
Disney currently hold a Zacks Rank #3 (Hold) as the near term earnings estimates have been revised lower. It should be noted that both next quarter and next year have been revised higher recently.
Current quarter sales are expecting to climb 15% higher, while earnings are projected to drop -13%. Looking farther out all other projections look promising. Next year sales are expected to grow 7%, and earnings are expected to jump 36%.
Image Source: Zacks Investment Research
After the release of Disney Plus, along with the mania that followed the Covid pandemic, Disney was bid up to unreasonable levels. Since then the stock has corrected over 50%, and valuations have become more reasonable. Disney is trading at a one-year forward earnings multiple of 23x, which is above its 10-year median of 19x.
Image Source: Zacks Investment Research
Conclusion
Protect your profits and protect your portfolio with stocks that have significant competitive advantage. Of course, that isn’t always the simplest thing as even stocks with considerable moats deal with periodic mismanagement, and deep drawdowns. These are stocks that should be held for the long term, and you really have to understand what the competitive advantage is, and make sure it is maintained.