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Why Moats Matter: The Morningstar Approach to Stock Investing by Heather Brilliant, Elizabeth Collins

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Chapter 14Industrials

The industrials sector is a hodgepodge. It’s an eclectic group of companies spanning a wide range of industries with varying characteristics and potential moat sources. As such, it’s difficult to generalize about moat sources, and we see a little bit of everything in this broad sector. In this chapter, we have selected just a few industries that we think are representative of how companies can establish moats, but given the breadth of industries in this sector, we don’t touch on every type of industrial firm.

Efficient scale, for example, is an important moat source for airport and marine-port operators as well as for railroads, given these businesses’ natural geographic monopoly positions and the limited number of facilities needed in any one market. Intangible assets are also a factor for many industrials. For airport operators, intangible assets come in the form of operating rights granted by the government, a prize usually won after years and years of relationship-building with the powers that be. Relationships are important in the aerospace and defense industry, too, where the most valuable intangible asset is familiarity with the complex workings of government customers. Switching costs also matter a lot in aerospace and defense, given the sophisticated technologies and significant training requirements. Cost advantage is a key driver for railroads, which can move freight more cheaply than many other transport options. And network effect helps heavy ...

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