4 Companies with Competitive Advantages

Argonaut Capital fund manager Barry Norris discusses his favourite four companies with sustainable competitive advantages

Alanna Petroff 5 September, 2012 | 12:01AM


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Alanna Petroff: Within any industry, there is always going to be stars and laggards. That goes for technology, utilities, any industry or sector that you can think of. So why not just focus on those companies that are doing very well, that have competitive advantages, that will outperform the rest of their peers? That's what Barry Norris from Argonaut Capital is looking to do. He looks to invest in companies with competitive advantages and he joins me today to talk about his strategy.

So, Barry, thanks for coming in.

Now, let’s go over why you are looking for competitive advantages?

Norris: Well I think in order to answer that question, we have to put in some sort of historic context because competitive advantages are always important but in some macroeconomic scenarios, they are more important. I think that's the scenario we're in today. So a few years ago, there was lots of growth in the world, there was lots of capital. So you could find industries where all of the companies were going to do well or all of the companies were going to do badly.

Today that's different. The world is low growth and although interest rates are low and likely to remain low, capital is difficult to access. So in that environment, companies with competitive advantages are likely to grow at rates, which are not only superior to GDP, but also superior to the overall growth rate in those industries. Those are the companies that I want to invest in.

Petroff: Okay. So now let’s look at some of the factors that contribute to competitive advantages. We have low cost. We have access to capital, scale and technology. So let’s start with low cost and I know that you’ve invested in Ryanair and Ryanair has a low cost model. So let’s talk about that a little bit.

Norris: Yeah. I mean, I think Ryanair is perhaps not necessarily the best customer experience, but it is a great stock. The reason why I say that is that the company is not only low cost in terms of ticket prices, but it’s low cost in terms of its business model. So Ryanair owns its own planes. It has very little debt. That means it can finance its business at lower rates than its competitors. It was a workforce, which is young and not unionized, so generally cheaper. It has planes which are new and more fuel efficient. And it generally flies to airports, which are cheaper. So that allows it to undercut its competition and expand its market share.

So what we're seeing is the traditional flag carriers, the likes of British Airways, they withdraw from short-haul leisure flights to focus on more lucrative long-haul and business flights and that allows Ryanair to grow at a much faster rate than what it would otherwise do.

Petroff: Okay. And now another competitive advantage, especially right now, is access to capital. So let’s discuss Nestle, because that's one of your investments that you say has great access to capital right now.

Norris: Well, I think the important thing is that everyone knows that since the credit crunch began, many companies and, in fact, many countries have had to pay more to access capital. But actually many countries have had to pay less as well. So in the UK at the moment, we've got record low borrowing rates and there are record low borrowing rates in the United States, in Germany, in Switzerland. So what it has done is accentuate the difference between the winners and the losers. The same is true of the corporate market where Nestle can borrow money at a record low rate.

So 10 years ago, Nestle borrowed money at 10%. Today they are borrowing money at 2%. That allows it to not only fund its own business at a cheaper rate, but it allows it to go out there and make acquisitions, such as Pfizer’s Baby Nutrition business, which it bought earlier on this year. Those businesses not only add to its strategic growth opportunities, but actually of course because they can finance at a very, very low rate of debt, actually are also earnings enhancing.

Petroff: Okay. Now the third factor that contributes to outperformance and contributes to competitive advantages is scale. And Anheuser-Busch has that within the brewing markets.

Norris: Yeah. I think Anheuser-Busch is a European company. Actually one in four of all pints or bottles of beer sold worldwide originate from Anheuser-Busch. And actually in the United States, in Brazil and Mexico, their market share is close to 50%. So for its scale, the company has not only been able to squeeze its suppliers, improve its purchasing power, improve its working capital, but it's also been able to push through price increases and so its margins are increasing at a very nice rate. And its distribution network also means that when it comes out with a new product, those new products could take market share very, very quickly.

Petroff: The final factor that we're going to discuss now is technology and how that contributes to competitive advantage and specifically you say that EADS has great technology that gives them a competitive advantage, so tell me a bit about that.

Norris: Well, EADS makes Airbus planes. Airbus planes account for more than half of all civil aerospace planes sold each year. So it's a fast growing market because of demand from emerging markets, but it's also a duopoly with Boeing. Now, many companies from Brazil, China, have tried to break into the market, but they failed and they will continue to fail. The reason for that is just the embedded competitive advantages that EADS has.

So for example, a new plane project will take over a decade from conception to when planes are first sold. Take the A380, the Superjumbo which EADS has developed, has cost over €10 billion in sunk costs. It's taken a decade to develop and only now is actually the company making money on that plane. So this is technology which is very, very difficult to replicate and this gives the EADS a sustainable competitive advantage, so it can continue generating profits from new plane sales for the decades to come.

Petroff: Okay. Thanks very much. That was Barry Norris from Argonaut Capital. And if you’d like to learn more about competitive advantages, click on the links below this video. Thanks for joining me.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Airbus Group NV EUR97.39 EUR-0.35-
Anheuser-Busch Inbev SA80.19 EUR0.20
FP Argonaut European Alpha A GBP Acc358.91 GBP0.38
Nestle SA77.10 CHF-0.10
Ryanair Holdings PLC EUR16.25 EUR4.81-
About Author Alanna Petroff

Alanna Petroff  is a financial journalist with Morningstar UK.