Nice vs. Moat | csinvesting

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A Reader’s Question on Niche vs. Moat

I found this blog post interesting: http://www.whopperinvestments.com/acmt-quality-at-a-discount. It raises an interesting question that I have thought about some: What is the difference between a moat and a mere niche? Can a niche be a moat?

Here, you have a local surety company that specializes in issuing bonds to construction companies with bad credit that the big boys aren’t interested in. Does that represent a moat of sorts in that the big competitors are not interested in this segment of the market? Or is it just a very narrow moat (if a moat at all) because the big competitors could move into it very quickly?

I looked at a finance company which specialized in subprime lending for used cars. It was very similar in that the big banks were not interested because it took too much work. The company was able to drive very high returns on capital. Again, moat or mere niche? These businesses are service businesses so while there might be local economies of scale, they won’t be very dramatic.

I think the advantage lies in the fact that big competitors have pursued mass market strategies based on easily repeatable processes with little customization. Perhaps they will leave this niche alone forever as it would not be particularly profitable. Or, they could train their sights on this niche and crush these ants. In the end, I would say this niche strategy provides a very narrow moat.

My Reply: From Greenwald’s Competition Demystified: When a company has stable market share, profit margins and excess cash generation with earnings power value above replacement/asset values–there is evidence of a franchise or MOAT. A company may have cyclical earnings, cash flows and margins but have a moat like Deere_VL. It may operate in a subset of a larger market like WD-40 (WDFC_VL) does in house-hold lubricants. WD-40 has over 90% of the US market in house-hold lubricants but then dilutes its returns somewhat by diversification into cleaners. It dominates a niche which gives it a high, stable market share with high, consistent returns.

You can have a niche business that fills a need and where you have a lower cost structure than larger competitors, but it doesn’t mean you have barriers to entry–see example of logging business below. Typically a niche business with a moat can’t grow beyond its boundaries without diluting its franchise or shareholder returns.

In a financial services business, the competitive advantage–if there is one–comes from better market intelligence and/or cost structure than a competitor. So, for example, you are lending for taxi medallions in the NYC market and you are the largest owner of taxi medallions then you have an informational advantage both in assessing the market, the borrowers and for acquiring new clients. Note this company: Medallion_AR.

GREAT QUESTION. I am sure other readers know more.

A Logging Business Niche Opportunity

From Aaron Esch, former About.com Guide

See More About:

Horses and a Portable Sawmill

Horse Logger Tim Kendall

With a portable sawmill and a team of horses you can carve out your own niche. Here is what you need to do. Advertise yourself as an eco-friendly logging company. Let people know that you log with horses which is a low environmental impact way of logging.

Sometimes all it takes is a little creativity and a willingness to think outside the box to find a new niche in an otherwise crowded industry. If you would like to start a small one or two-man logging business consider this approach.

There are millions of board feet of good usable timber that is passed by everyday by the big sawmills and logging companies. This is a tremendous opportunity for you as a small logging company. You can go into a small wood lot and harvest timber because you don’t have all the overhead that the big guys do.

Definition Wikipedia:

A niche market^[1] is the subset of the market on which a specific product is focusing. So the market niche defines the specific product features aimed at satisfying specific market needs, as well as the price range, production quality and the demographics that is intended to impact. It is also a small market segment. For example, sports channels like STAR Sports, ESPN, STAR Cricket, and Fox target a niche of sports lovers. Every product can be defined by its market niche. As of special note, the products aimed at a wide demographic audience, with the resulting low price (due to price elasticity of demand), are said^[who?] to belong to the mainstream niche—in practice referred to only as mainstream or of high demand. Narrower demographics lead to elevated prices due to the same principle. So to speak, the niche market is a highly specialized market aiming to survive among the competition from numerous super companies. Even established companies create products for different niches, for example, Hewlett-Packard has all-in-one machines for printing, scanning and faxing targeted for the home office niche while at the same time having separate machines with one of these functions for big businesses.^[2]

In practice, product vendors and trade businesses are commonly referred as mainstream providers or narrow demographics niche market providers (colloquially shortened to just niche market providers). Small capital providers usually opt for a niche market with narrow demographics as a measure of increasing their financial gain margins.

Class Notes (Several readers have asked me to post in one place)

Greenwald_2005_Inv_Process_Pres_Gabelli

Class Notes #1 Introduction to Value Investing for Special Situations

Sealed Air Case Study_Handout Sealed Air 1998 10-K Greenwald_Class_Notes_6_-_Sealed_Air_Case_Study

Hudson General Case Study_Read this First

Valuing Hudson General and Analysis

Greenwald Class Notes 5 – Liz Claiborne & Valuing Growth(2)

Class Notes #1 Introduction to Value Investing for Special Situations

Class Notes #2 Intro and Duff and Phelps Case Study

Class Notes #3 Institutional Investor on Value Investing and Lear

Lear 10K 2005 for Class #3 and Lear 10K 2006 Class #3

Class Notes #4 Investor buying distressed Tech Company