On a similar theme:
Peter Offringa | Unlocking Durable Growth in Software Companies | Benzinga FinTwit Conference
Peter is the founder of Software Stack Investing, a free blog that provides incredibly detailed analysis of software infrastructure companies such as Crowdstrike, ZScaler, Mongo DB, Snowflake and DataDog. All US-based of course.
This presentation from the very recent FinTwit conference provides a good summary of the attributes of companies that are able to grow faster for longer. Whilst all the examples of these attributes are from the above software infrastructure companies, the ideas explored in the (hour long) video have very broad applicability.
Videos of all the other presentations at this conference are also available here.
Yep, we all know what a MOAT is, and its importance, but it is a qualitative thing and hard to quantify. I’ve just finished reading a great little book called Rule #1 by Phil Town and he has managed to quantify it by reference to its end-result.
Here are his five sure fire indicators of the existence of a MOAT:
1. The best indicator of a wide moat is return on investment capital (ROIC) over at least a ten-year period. ROIC is the rate of return a company makes from the money it invests in itself in a year. If a company can hold onto a ROIC of at least 15 percent for ten years, it’s likely beaten out its competitors, which now means it has an advantage.
2. Another good way to gauge a wide moat is by the growth of a company’s equity base (by earnings reinvested, not shares issued). If a company’s equity increases by 15 or more percent for at least ten years, it’s an indicator that it has enough money to invest into its expansion, which also puts the company in a solid, competitive position.
3. Are earnings per share increasing by at least 15% over the nominated term
4. Are sales growing by 15% of more over the nominated term
5. The last calculation is the free cash flow growth rate. If this is consistently over 15 percent, this means profits turn into cash.
Of course, one can debate the toss on whether a MOAT requires 10% or 15% or 20% or higher.
In my universe which is micro and small caps, I use 15% and a minimum of 3 years and 5 if they have traded that long.