One of the most important aspects of investing is buying companies which have relatively wide economic moats. Examples of this include low costs compared to competitors, or a unique product and a high degree of brand loyalty. In all three cases, the company in question is likely to benefit from relatively high margins and a degree of resilience which its competitors may not enjoy.
One company which appears to have a wide economic moat is Domino's Pizza Enterprises Ltd. (ASX: DMP). It has successfully targeted the teen and twentysomething market through its adoption of a slick and fun marketing campaign, with Domino's utilising social media better than most of its peers.
For example, its marketing campaign which centred on the creation of your own pizza using a wide range of ingredients was a relatively simple idea. However, the execution was impressive since customers shared their creations on social media with friends and this provided increased customer interaction as well as improved brand loyalty.
Furthermore, Domino's has also utilised other simple ideas to improve the customer experience such as a slick ordering process and a GPS driver tracker. And, with Domino's diversifying its menu options, it is leveraging its strong customer base so as to cross sell new products which in many cases offer relatively high margins.
With Domino's trading on a price to earnings growth (PEG) ratio of 2.1 versus 1.4 for the ASX, it is hardly cheap. However, with annualised earnings growth of 15.2% over the last decade, it is highly consistent and, with a wide economic moat, still has a sufficiently wide margin of safety to merit investment.
Meanwhile, Coca-Cola Amatil Ltd (ASX: CCL) also has a very wide economic moat through the strength of its brand and customer loyalty. Despite this, its strategy has been rather unsuccessful in recent years and its bottom line has fallen by 4% per annum during the last five years.
However, with a new strategy the company is due to report a rise in earnings of 6.3% in the next financial year, with cost cutting, efficiencies and changes to its product offering set to have a positive impact on its financial performance.
For example, Coca-Cola Amatil has launched new products such as Coca-Cola Life in an attempt to better align itself with more health-conscious consumer tastes, while new serving sizes are also proving popular. And, with Coca-Cola Amatil investing US$500m in Indonesia, it is now better-positioned to deliver improved growth prospects, as well as a more diversified revenue stream.
While Coca-Cola Amatil trades at a premium to the ASX, with it having a price to earnings (P/E) ratio of 17.1 versus 15.3 for the wider market, its wide economic moat means that it appears to offer good relative value at the present time. That's especially the case due to its refreshed strategy which looks set to turn around its 21% share price fall of the last five years.
