Over the last few months I’ve been looking at ASX shares with different kinds of moats. There are four main moats outlined by Pat Dorsey in his book The Little Book That Builds Wealth;
- Intangible assets
- Customer switching costs
- The network effect
- Cost advantages
It turns out that there are a lot of fantastic ASX shares that fall into these categories, so I have picked out my five favourite companies with huge moats to own today.
1. Wesfarmers Ltd (ASX: WES)
Almost all of the businesses in the Wesfarmers group are beautiful examples of the low-cost advantage. These include large-scale hardware chain Bunnings and big retail stores Kmart and Target. Bunnings, in particular, is fascinating because it has enormous purchasing power supported by the more than 370 stores it had at 31 December 2019.
The scale of Bunnings stores and their low-cost product offerings means that the sheer volume of sales in the 2019 financial year resulted in a monster return on invested capital (ROIC) of 50.1%!
2. Xero Limited (ASX: XRO)
I already own shares in accounting platform Xero, but would love to own more. Why? Because I think it is a perfect example of a product with high switching costs. Once a customer is set up with Xero, the software becomes deeply embedded into the daily running of their business. It becomes a daunting task to consider shifting to a competitor.
This is reflected in Xero’s customer retention rates. The number of customers that leave Xero is known as ‘churn’ and in the 12 months to 31 March 2020, Xero had an average monthly churn of just 1.13%. This strong customer retention gives Xero a pricing power that it can deploy to counter cost inflation.
3. CSL Limited (ASX: CSL)
At the core of blood product company CSL lies a strong intangible asset moat. Through research and development, as well as acquisitions, CSL holds the rights to produce and sell lifesaving medicines and immunotherapies. The company’s diverse portfolio of products makes the moat far more robust because patents can be challenged and have a finite life.
4. Fisher & Paykel Healthcare Corp Ltd (ASX: FPH)
Breathing device manufacturer Fisher & Paykel Healthcare is another company supported by a moat of patents which protect its highly sought after masks and CPAP devices. In addition, the company’s low-cost Mexican manufacturing operation increases sales margins to maintain strong profits. No wonder the Fisher & Paykel Healthcare share price has surged more than 130% in the last 12 months.
5. Pushpay Holdings Ltd (ASX: PPH)
Similar to Xero, faith software company Pushpay has created a service which is characterised by strong switching costs. Once Pushpay’s church customers are set up with the software, and the congregation has downloaded the app, it is a time-consuming and disruptive process to change to a competing product. PushPay has been growing strongly and has a revenue retention rate of 97.5%.