Tollbooth Businesses

[Rainier]

I love finding companies that operate basically like a tollbooth - i.e. a company that provides access to some type of service that is both critical and difficult/impossible for their customers to replicate. As such, the tollbooth can can charge a fee to essentially every user who wants access to that service. I would also add that I think they need to be fairly immune to near-term technological disruption (nothing is ever completely immune, but difficult for known technological advances to disrupt the toll collection). So, something like MS Office or ADBE's suite of products don't really qualify for me (although they probably would have 10 years ago). Alot of software that I would have historically thought of as a tollbooth is not really in that category now due to the unknown disruption of AI software development advances.

 

I was thinking about this because I started looking at GDDY and I thought about starting a thread on it (I still might do that). Then I started looking at my portfolio and my watchlist and realized was thinking about the types of businesses I gravitate toward. I realized that a large percentage of my mental bucket of long-term buy and (hopefully) never sell companies (that I either own now or want to buy at the right valuation) are what I would consider a tollbooth. At this point, that personal portfolio/watchlist consists of a basket of the several financial exchanges, MELI, EBAY, V, MA, CPNG, SE, VRSN, railroads, GOOG, MCO, SPGI, VRSK, and a few utilities.

 

Does anyone have other good examples of tollbooth businesses? I am sure there are lots of niches that I've never heard about.

 

Examples of decent businesses I would consider tollbooths:

 

• Financial Exchanges - Why they are tollbooths? Because market participants want third party exchanges for price transparency and liquidity.  They don't necessarily have insurmountable moats (new exchanges pop up now and then), but a company cannot really issue public shares without the existence of some exchange.  (my list now includes CME, CBOE, NDAQ, ICE, MKTX, OTCM, MIAX, HKXCY, JPXGY, LSEGY, BOLSY, TVAV, ABAXX, TMXFF, ASXFY, DBOEY, EUXTF, HEXEY, MSCI's index and etf business probably best fits in this category)
• Rating agencies - Similar to the financial exchanges; if you want access to a broad range of bond buyers, want your stock rated, or want a consumer credit score, then you have to utilize a small number of third party firms to do it (MCO, SPGI, TRU, EFX, EXPGF, VRSK)
• Ubiquitous payment networks - Massive infrastructure in place that allows extremely fast and reliable payment transactions. The cost benefit analysis of any single vendor or bank creating their own is unlikely to make economic sense. Would be an enormous undertaking to recreate what these major networks have in place. (in the US I would probably only put V, MA, PYPL on the list of true tollbooths and possibly COF. Would love to know of others)
• Airports - Customers, airlines, governments all have a laundry list of reasons to insist that air travel be regulated and transparent. (I am ignorant of good publicly traded airports, although I am sure they exist)
• Ubiquitous retail sales platforms - Essentially scale and name recognition is why I would consider them tollbooths. Having one account allows the customer access to a huge number of sellers/products and sellers to have access to a huge number of customers. Ease of transactions and reliability.  (EBAY, MELI, ETSY, SE, CPNG, BABA, JD)
• Internet infrastructure companies - They provide some type of service that is critical in operating a website. (GDDY, AKAM, VRSN, NET - there are probably alot more of these, but I'm not well versed in this area)
• Other types of ubiquitous marketplaces - Same as retail sales networks - recognition, reliability, safety, payment consistency, etc. (ABNB, UBER)
• Advertising - This primarily has to do with scale and infrastructure. (the best here is obviously GOOG, but the only pure play I know of is TTD and I am not sure how durable it is)
• Railroads - Rail is very cost effective in many cases and it would be nearly impossible to replicate the large rail systems. (CSX, UP, CN, NS, etc)
• Utilities - This is obvious and there are a million of them

 

There are also tollbooths buried within conglomerates (GOOG's advertising, MSFT's Azure, AMZN's retail site and AWS, BNSF inside BRK, etc.). 

 

I'd love to hear of other examples. Large or small.

 

 

Edited January 20 by Rainier

[gfp]

That's a long post but did you include the trash / landfill companies? (WM, RSG, etc)

 

Maybe the literal toll roads of pipeline companies?  Aggregates queries (because shipping costs)?

[Michael Campbell]

Chris Hohn of TCI owns and speaks very highly of Ferrovial, a literal toll road and airport developer and operator. Hard to argue against his endorsement.

[Rainier]

22 minutes ago, gfp said:

That's a long post but did you include the trash / landfill companies? (WM, RSG, etc)

 

Maybe the literal toll roads of pipeline companies?  Aggregates queries (because shipping costs)?

Thanks.

 

Good point on the waste management companies. Didn't think of that; they're basically like utilities.

 

Also a good point on pipelines. I've avoided them because I don't have the desire to file K-1s for taxable accounts. I did own AMLP (an ETF owning MLPs) up until selling about six months ago. It did pretty well for a 3-4 year period along with an 8-10% yield.

[Rainier]

17 minutes ago, Michael Campbell said:

Chris Hohn of TCI owns and speaks very highly of Ferrovial, a literal toll road and airport developer and operator. Hard to argue against his endorsement.

Thanks, that sounds like something worth looking at. This will probably sound really stupid, but I think I saw the name Ferrovial at some point (without any context) and assumed it was some type of metals/mining company.

Edited January 20 by Rainier

[Marco Van Basten]

16 minutes ago, Rainier said:

Thanks, that sounds like something worth looking at. This will probably sound really stupid, but I think I saw the name Ferrovial at some point (without any context) and assumed it was some type of metals/mining company.

Aena is probably the best airport owner out there, however the Spanish government despite owning 50%  i think screwed shareholders during Covid (abrogating minimum guarantees.)  ADP has a 70 year concession for the Paris airport.  Keep in mind, a lot of airports like ASUR and other Mexican ones are concessions.  

[Eldad]

You see all of these same names over and over. Everyone knows them and the price reflects that. 
 

I am really starting to think you have to find the not so oblivious ones that are maybe not quite as strong. Pay a much lower price for a weaker and more incognito moat and maybe get a better result. Software may be our early warning. The world is in a chaotic period on many fronts. 

[brobro777]

VRSN could be considered a tollbooth I guess

 

[WayWardCloud]

9 hours ago, Rainier said:

• Airports - Customers, airlines, governments all have a laundry list of reasons to insist that air travel be regulated and transparent. (I am ignorant of good publicly traded airports, although I am sure they exist)

 

You could look into Fairfax India, they own the Bangalore airport.

[formthirteen]

Thank you for starting the thread. I like tollbooth stocks and have too many in my portfolio.

 

I had a look at some of the stocks that I have been following or own and found some interesting stocks that are down ~50% or more, for example:

AUTO.L - Auto Trader UK (gross margin ~80%, operating margin ~60%)
RMV.L - Rightmove (gross margin 100%?, operating margin ~65%)

HEM.ST - Hemnet Group AB (gross margin 100%?, operating margin ~45%)

WKL.AS - Wolters Kluwer (operating margin 24.6%)

FDS - Factset Research

 

So even tollbooths can go down 50%.

[Saluki]

20 hours ago, Rainier said:

I love finding companies that operate basically like a tollbooth - i.e. a company that provides access to some type of service that is both critical and difficult/impossible for their customers to replicate. As such, the tollbooth can can charge a fee to essentially every user who wants access to that service. I would also add that I think they need to be fairly immune to near-term technological disruption (nothing is ever completely immune, but difficult for known technological advances to disrupt the toll collection). So, something like MS Office or ADBE's suite of products don't really qualify for me (although they probably would have 10 years ago). Alot of software that I would have historically thought of as a tollbooth is not really in that category now due to the unknown disruption of AI software development advances.

 

I was thinking about this because I started looking at GDDY and I thought about starting a thread on it (I still might do that). Then I started looking at my portfolio and my watchlist and realized was thinking about the types of businesses I gravitate toward. I realized that a large percentage of my mental bucket of long-term buy and (hopefully) never sell companies (that I either own now or want to buy at the right valuation) are what I would consider a tollbooth. At this point, that personal portfolio/watchlist consists of a basket of the several financial exchanges, MELI, EBAY, V, MA, CPNG, SE, VRSN, railroads, GOOG, MCO, SPGI, VRSK, and a few utilities.

 

Does anyone have other good examples of tollbooth businesses? I am sure there are lots of niches that I've never heard about.

 

Examples of decent businesses I would consider tollbooths:

 

• Financial Exchanges - Why they are tollbooths? Because market participants want third party exchanges for price transparency and liquidity.  They don't necessarily have insurmountable moats (new exchanges pop up now and then), but a company cannot really issue public shares without the existence of some exchange.  (my list now includes CME, CBOE, NDAQ, ICE, MKTX, OTCM, MIAX, HKXCY, JPXGY, LSEGY, BOLSY, TVAV, ABAXX, TMXFF, ASXFY, DBOEY, EUXTF, HEXEY, MSCI's index and etf business probably best fits in this category)
• Rating agencies - Similar to the financial exchanges; if you want access to a broad range of bond buyers, want your stock rated, or want a consumer credit score, then you have to utilize a small number of third party firms to do it (MCO, SPGI, TRU, EFX, EXPGF, VRSK)
• Ubiquitous payment networks - Massive infrastructure in place that allows extremely fast and reliable payment transactions. The cost benefit analysis of any single vendor or bank creating their own is unlikely to make economic sense. Would be an enormous undertaking to recreate what these major networks have in place. (in the US I would probably only put V, MA, PYPL on the list of true tollbooths and possibly COF. Would love to know of others)
• Airports - Customers, airlines, governments all have a laundry list of reasons to insist that air travel be regulated and transparent. (I am ignorant of good publicly traded airports, although I am sure they exist)
• Ubiquitous retail sales platforms - Essentially scale and name recognition is why I would consider them tollbooths. Having one account allows the customer access to a huge number of sellers/products and sellers to have access to a huge number of customers. Ease of transactions and reliability.  (EBAY, MELI, ETSY, SE, CPNG, BABA, JD)
• Internet infrastructure companies - They provide some type of service that is critical in operating a website. (GDDY, AKAM, VRSN, NET - there are probably alot more of these, but I'm not well versed in this area)
• Other types of ubiquitous marketplaces - Same as retail sales networks - recognition, reliability, safety, payment consistency, etc. (ABNB, UBER)
• Advertising - This primarily has to do with scale and infrastructure. (the best here is obviously GOOG, but the only pure play I know of is TTD and I am not sure how durable it is)
• Railroads - Rail is very cost effective in many cases and it would be nearly impossible to replicate the large rail systems. (CSX, UP, CN, NS, etc)
• Utilities - This is obvious and there are a million of them

 

There are also tollbooths buried within conglomerates (GOOG's advertising, MSFT's Azure, AMZN's retail site and AWS, BNSF inside BRK, etc.). 

 

I'd love to hear of other examples. Large or small.

 

 

 

I was thinking of META and GOOG in terms of tollbooths also. I don't know of any small business that doesn't advertise on Facebook, and Google is still the number 1 and 2 (YouTube) search engine giant, which should keep growing with the growth of the internet. 

 

In terms of something like Meta, I have small positions in DOCS (LinkedIn for Doctors and Nurses) and ZETA (which has a lot of customer info, just like Facebook for targeted marketing) while I study them. 

 

In energy, we have ships like VLCCs, which have no moat, but also have companies like LNG or VG that have a moat and can use a toll bridge model. Ditto for pipelines like EPD or ET.  Whether gas is up or down, you still have to move it through pipes because it's cheaper than land transport. 

 

 

 

[rogermunibond]

Mexican airports are publically traded.  OMAB (Central), PAC (Pacific - TJ and Guadalajara), and ASR (Southeast-includes Cancun).  There was a great opportunity to buy Mexican airports in 2023 when the govt raised its take on the license fee.  The airports all bounced back strong as they pass most of this on to vendors/airlines etc.

[Eldad]

35 minutes ago, rogermunibond said:

Mexican airports are publically traded.  OMAB (Central), PAC (Pacific - TJ and Guadalajara), and ASR (Southeast-includes Cancun).  There was a great opportunity to buy Mexican airports in 2023 when the govt raised its take on the license fee.  The airports all bounced back strong as they pass most of this on to vendors/airlines etc.

This is exactly what I want to avoid lol. Those things can and probably will be nationalized in a day. Kinda my point on if the toll booth is too obvious it’s actually a bad thing. 

[Libs]

6 hours ago, formthirteen said:

Thank you for starting the thread. I like tollbooth stocks and have too many in my portfolio.

 

I had a look at some of the stocks that I have been following or own and found some interesting stocks that are down ~50% or more, for example:

AUTO.L - Auto Trader UK (gross margin ~80%, operating margin ~60%)
RMV.L - Rightmove (gross margin 100%?, operating margin ~65%)

HEM.ST - Hemnet Group AB (gross margin 100%?, operating margin ~45%)

WKL.AS - Wolters Kluwer (operating margin 24.6%)

FDS - Factset Research

 

So even tollbooths can go down 50%.

 

OK, that seems like a good list to research. Thanks

[Cod Liver Oil]

WeChat is probably a toll booth if you are comfortable with China.

[Xerxes]

PM Carney says federal government open to selling public assets to fund projects

 

https://www.ctvnews.ca/business/article/carney-says-hes-open-to-selling-infrastructure-like-airports-to-finance-projects/

[SharperDingaan]

Dependent upon your investment horizon, look at SouthBow Energy ......  https://www.southbow.com/

 

Should Keystone 2.0 actually get built, there will be additional volume, and some kind of reversal of the existing Keystone 1.0 write-off (multi Billion). All that returning equity boosting the financial metrics, and lowering the ongoing cost of borrow.

 

Just keep in mind that in its early years, it might not always be full; as the Canadian incremental preference will always be additional west vs south bound flow. In its later years it will be full of south bound Alaskan/Arctic crude, and strategically resemble the Saudi pipe to the Red Sea (avoiding a blocked SOH, little different to avoiding a blocked NW passage). 

 

SD