Right Price Checklist: Moat

Business, and an explanation of the Checklist

Moat

Does it have a moat?

This may seem like one of the hardest things to find in investing, but it is inherently easy to find if a company has a moat.

A moat is just something that differentiates one's company from another and allows it to earn higher returns selling its products or services.

What is the moat?

This is harder to find, a company may have a great moat, but what is it? Do they offer the lowest price (eg Wal-Mart), are there barriers to entry in the industry (Waste Management), high switching costs (Adobe), does it have a great brand (American Express) or does it have a better quality product (Lexus).

Many companies have other variations of the above mentioned moats and many companies have multiple moats.

How long will it last?

This is the hardest thing to judge, and is usually a crapshoot.

Most technology companies rarely have a moat for long, because someone just has to come along and recreate their model.

But, some companies, like Coke, Gillette or American Express, have had moats for half a century with no signs of any one coming close to them.

Estimating how long a moat will last is the most important part of business analysis because it tells the analyst how to structure his DCF and if he's right (like many investors were with Netflix when Wall St. thought they didn't have a moat) he gains a huge edge against Wall St. and will probably earn high returns.

Best Buy

Does it have a moat?

Best Buy currently has a huge moat, as before show, it has thrashed its industry returns average over the past ten years.

In my personal experience I and a lot of friends feel Best Buy is the best place to get a gift card, and I have never seen it not completely full around Christmas.

What is the moat?

Best Buy competes indirectly with tons of stores, like Costco, Wal-Mart and Sears. But, nationally it only has two real direct competitors, Circuit City and Tweeter.

In the speciality retail industry it absolutely dominates all other competitors.

It does this through vastly superior service. Other retailers try to compete with it based only on price, but consumers still flock to Best Buy because of the service it offers.

It's Geek squad brand (which offers at home fixes for technology problems and enhance the computers by deleting useless free trial programs) and knowledgeable sales people compel consumers to go to their store instead of Circuit City or even Costco.

How long will it last?

Best Buy has been doing this for a long time, and it seems like it knows how to do it, recently renewing focus on customer service.

But, retailers traditionally can't keep competitive advantages for a very long time, Sears, K-Mart and Macy's are all retailers that once had big moats only to fall to innovation.

In a conservative estimate I believe Best Buy can keep its moat for at least 5 more years as it continues to fend off tons of companies focused on taking its customers.

I also believe that even if a brick-and-mortar competitor can break its moat (very unlikely) or a website can be established (more likely) Best Buy would still be a very attractive buy-out opportunity for a company like Amazon or Costco.