There aren't a lot of businesses you can call "bulletproof." It seems that competition is always around the corner, and innovators are trying to upend even the most established industries all the time.
But there are companies with qualities that make them harder to knock off than others. We've asked four of our contributors what companies they see as bulletproof, and here are the ones they would bet on.
Source: Union Pacific.
Dan Caplinger (Union Pacific): Transportation stocks have benefited greatly from the plunge in energy prices lately, and railroad giant Union Pacific (UNP 0.25%) stands to see dramatic cost reductions due to lower fuel costs that could have a marked impact on the company's overall profitability. Already, Union Pacific saw its overall spending on fuel drop 10% in the fourth quarter of 2014 despite seeing higher shipping volume, and if diesel prices remain below the $2 per gallon level, where they are right now, Union Pacific could save another 25% on fuel during the full 2015 year.
Some investors fear Union Pacific could see some downward pressure as a result of the energy bust. The railroad has seen its transport of crude oil and related chemicals and materials like fracking sand rise dramatically since the U.S. oil boom began, and any signs of falling production could reverse those trends. Yet with expectations that low energy costs could spur economic growth in other sectors, Union Pacific hopes the net impact on shipping volume will be positive and will help make the railroad giant even more profitable in the long run.
With the company controlling an important portion of the western U.S. with its network of railways, Union Pacific will remain bulletproof as long as Americans want to buy things beyond their local communities.
Travis Hoium (3M): Few companies have their hands in as many industries as 3M (MMM 0.57%) and that's an advantage all by itself, but it's how the company interacts with these industries that makes it truly bulletproof. 3M provides critical inputs, primarily in the form of films, to industries as diverse as tech, energy, and even advertising. It's likely in the screen you're reading this article on right now, and in some way probably played a role in building or painting the building you might be in as well.
But 3M isn't interested in making the smartphone or the TV or the building. It's interested in offering solutions that help make those things possible. On the same token, a customer like Apple (AAPL -0.57%), who uses 3M films in most of its products, doesn't want to be an expert in making brightness-enhancing films, it wants to buy them from a trusted supplier like 3M.
This is where 3M's collective knowledge base makes it an indispensable part of industry. In 3M's labs -- where I worked for many years -- 3M is creating solutions to problems people don't even know exist, and it's fixing problems its customers don't want to solve themselves. Their key competency is in films and coating, which are high-margin products but aren't exactly the kind of products start-ups are going after in today's market.
It also takes a large amount of capital and intellectual property to compete with many of 3M's products, giving the company a solid competitive moat. Add all of these factors up and throw in the great diversity in its business, and I don't think there are many companies more bulletproof than 3M.
Rich Smith (Honda): In the universe of car companies, Honda Motor Co. (HMC -0.75%) doesn't get enough respect. Its P/E ratio -- 12.8 as of today -- sits smack-dab in between those of fellow Japanese automakers Nissan and Toyota. By and large, investors value Honda at a lower P/E premium than either General Motors or Ford.
Granted, Honda's operating profit margin of 5.7% lags that of Toyota, and analyst projections of only 7% annualized earnings growth won't burn any barns, either. And yet, Honda is a business built to last -- crucially, because while all these other companies are fine "carmakers," Honda is much more than just cars.
As I learned recently when reading Jeffrey Rothfeder's engaging work Driving Honda, Honda "Motor" Co. is more than just a name. Honda, in fact, is the world's largest maker of motors for everything from cars and trucks, to "motorcycles, lawn mowers, snowblowers, and other power equipment" as well, producing 20 million equipment motors annually. Honda also sells 15 million motorcycles a year -- three times as many as its second-place rival, Yamaha, and 30 times more than Harley-Davidson. And from ASIMO personalized robots to HondaJet airplanes, Honda is expanding its business into areas its competitors haven't even begun to explore.
When buying Honda stock, you won't just own a share of one of the world's biggest car companies, but also the dominant motor and motorcycle maker in the world, and an inventor of the technologies of tomorrow as well. This, to me, is the definition of a business built to last.
Source: Boeing.
Steve Heller (Boeing): When I think about a bulletproof business, the first traits that come to mind are large competitive advantages, high barriers to entry for new competition, deep economic moats, and rock-solid financials. From this perspective, there are few companies that compare to aviation giant Boeing (BA 0.01%).
To start, Boeing's massive backlog gives it rock-solid stability that makes most other businesses envious. As of the fourth quarter, Boeing had an order backlog worth $502 billion, which is equivalent to more than five times its 2015 sales estimates, and it acts as a great buffer during times of economic uncertainty. Boeing's backlog also helps the company more easily predict its revenues, which largely becomes a function of meeting its internal production targets.
In terms of future opportunity, Boeing estimates that over the next 20 years, the world will need nearly 37,000 new airplanes, which it believes is worth upwards of $5.2 trillion. This growth dynamic, combined with the reality that the barrier to entry into the commercial aviation business is extremely high, bodes well for Boeing's long-term growth prospects.
On the financial front, Boeing's most recent dividend increase of 25% and plan to buy back $12 billion of stock -- the largest in company history -- are a testament to management's confidence in its balance sheet and future cash flows. Over the last five years, Boeing has reduced its long-term debt by 27% and increased its free cash flow -- money that can be returned to shareholders or reinvested back into the business -- by over 260%:
BA Total Long Term Debt (Annual) data by YCharts.
For around 21 times earnings, roughly in line with the S&P 500, investors get the opportunity to own a business with strong financials, a deep economic moat, stable growth prospects, and relatively low competition. To me, that valuation seems quite reasonable for one of the most bulletproof businesses on the market today.
