Small cap moats

[APG12]

Although I don't see how Amazon and St Joe should be there.

 

I highly doubt this is why they included AMZN, but imagine running a company where the owners don't care if you actually make any money. In retailing that seems to me to be a pretty large advantage.

[dpetrescu]

I agree that Amazon does not have much competition. But I wouldn't say they a under or even reasonably valued.

 

Also, they have market share dominance but they don't really have pricing power. Maybe they will once they're done driving every other online retailer out of business? Didn't Bezos say that his outlook is 100 years not one year.

[yadayada]

can they do that? Just raising prices, and lowering them as soon as some other business becomes a little bit of a threat. And then running them out of business. And then after a while barely anyone even tries.

[Morgan]

I'm stealing (or cloning ;)) this from the book Value Investing: From Graham to Buffett and Beyond (Greenwald, et al), but WD-40 (WDFC) seems to have a pretty solid moat and unique market position. The normal 12oz can of the stuff is $5. I go to Lowe's about 20 times a month and I don't even know the competing brands names. Assuming there are competitors, how much cheaper would the alternative have to be for me to buy it? Super cheap. ~$1-$2 tops. Then even if it was $2, I'm not sure I would buy it because I rarely buy WD-40 so I need it to work guaranteed. I know WD-40 will. Will the competitor?

 

WD-40 style lubricant isn't difficult to make as far as I know, so the production costs for each company should be similar. So the newcomer's margins are likely to be really small or negative as they have to lower their price dramatically and spend on advertising as well. What ways can a newcomer gain market share? Be backed by a larger company set on taking market share? What is the timeline for that to happen? Could WD-40 simply lower its prices and wait it out? Probably. They have $90m in cash and securities. That's 2-3 years of earnings.

 

Currently trading for about $1 billion with 26x PE ratio. Seems a little pricey at the moment (up~150% since 2009), but something to keep an eye on.

 

 

Edit: WDFC makes about $35m/year, at what price could they afford to service the debt load from a LBO? $500m with $150m down and $350m debt (5% for 15 years)? That's about $33.2m/year. Interesting to think about.

[tradevestor]

Slightly OT:  Speaking of moats... Brand loyalty was a way of reducing risk in an information poor environment.  Today, with online reviews,  the value of brand may not be as valuable as it was before.  Does that mean brand name isn't as useful a moat as before ?

 

http://www.newyorker.com/talk/financial/2014/02/17/140217ta_talk_surowiecki

[jouni1]

in customer products, i think brand means less with so much information available so quickly these days.

 

just look at nokia and blackberry for example. these used to be red hot market leading brands. products that stay the same (cleaning products, sweets etc) seem to have more sustainable moats in their brands.

[RichardGibbons]

I think when it comes to brand, it provides a greater competitive advantage for lower cost items.  I'm not going to spend even three minutes researching candy bars on the internet, but I will spend at least an hour if I'm looking for a new consumer electronics device or vehicle.

[rkbabang]

I think when it comes to brand, it provides a greater competitive advantage for lower cost items.  I'm not going to spend even three minutes researching candy bars on the internet, but I will spend at least an hour if I'm looking for a new consumer electronics device or vehicle.

 

Exactly.  This is why WD-40 is an excellent example.  Why would I ever bother doing any research or trying something new when it is in-expensive enough and it works?  When my can goes empty I just buy another one the next time I'm at a home improvement store.  I've had WDFC on my watch list for a while but haven't bought it.  They also own 3-in-One Oil, which doesn't have the moat that WD-40 has, but is another well known brand and something cheap enough that you wouldn't bother buying the competitor.

 

 

[gg]

I think when it comes to brand, it provides a greater competitive advantage for lower cost items.  I'm not going to spend even three minutes researching candy bars on the internet, but I will spend at least an hour if I'm looking for a new consumer electronics device or vehicle.

 

Exactly.  This is why WD-40 is an excellent example.  Why would I ever bother doing any research or trying something new when it is in-expensive enough and it works?  When my can goes empty I just buy another one the next time I'm at a home improvement store.  I've had WDFC on my watch list for a while but haven't bought it.  They also own 3-in-One Oil, which doesn't have the moat that WD-40 has, but is another well known brand and something cheap enough that you wouldn't bother buying the competitor.

 

Is WD-40 a patented formula that can't be reproduced and sold under a generic store brand? If that's the case, long term, I would imagine that they'd have to lose out longer term to cheaper generic store versions. I've seen significant willingness within my network of people to switch the generic brands, whether its cereal or canned food at the grocery store, or the Walgreens-branded versions of common drugs like sudafed/zyrtec/advil. In all these cases, it's inexpensive items that are just being bought for slightly cheaper, but I have definitely noticed them taking up more shelf space at stores (as well as seen them more often at friends/family's homes).

[LC]

I think when it comes to brand, it provides a greater competitive advantage for lower cost items.  I'm not going to spend even three minutes researching candy bars on the internet, but I will spend at least an hour if I'm looking for a new consumer electronics device or vehicle.

 

Exactly.  This is why WD-40 is an excellent example.  Why would I ever bother doing any research or trying something new when it is in-expensive enough and it works?  When my can goes empty I just buy another one the next time I'm at a home improvement store.  I've had WDFC on my watch list for a while but haven't bought it.  They also own 3-in-One Oil, which doesn't have the moat that WD-40 has, but is another well known brand and something cheap enough that you wouldn't bother buying the competitor.

 

Is WD-40 a patented formula that can't be reproduced and sold under a generic store brand? If that's the case, long term, I would imagine that they'd have to lose out longer term to cheaper generic store versions. I've seen significant willingness within my network of people to switch the generic brands, whether its cereal or canned food at the grocery store, or the Walgreens-branded versions of common drugs like sudafed/zyrtec/advil. In all these cases, it's inexpensive items that are just being bought for slightly cheaper, but I have definitely noticed them taking up more shelf space at stores (as well as seen them more often at friends/family's homes).

 

Depends on the strength of the brand. Hershey and Marlboro are still going strong. And it's cheap enough to warrant spending an extra buck for the peace of mind that it will work, that you know how to operate it, etc.

[rogermunibond]

WD 40 is kind of a crappy lubricant actually. I think people grab for it because of the convenience and mind share (nice moat), but I've gotten better use from silicone spray or machine oil.