Being the only game in town, or simply being the best at what it does, can help a company generate more profits than the competition. That's why we love stocks that have a massive competitive edge over rivals since it makes it more likely that these businesses will deliver outsized returns for investors. While the companies boasting these advantages are few and far between, three that caught our attention are Sirius XM Holdings (SIRI -3.24%), Disney (DIS 2.46%), and Williams Partners (NYSE: WPZ).
Dialing up a nearly impenetrable business model
Sean Williams (Sirius XM Holdings): I may not be a fan of satellite radio provider Sirius XM Holdings, but I also can't deny that it has a near-monopoly in the satellite radio space, which gives it clear competitive advantages that should translate into healthy long-term profits.
Though Sirius XM does face competition from online radio providers and terrestrial radio, there's a very big difference between its model and standard radio providers: advertising.
Companies like Pandora Media (P) and terrestrial radio providers are heavily reliant on advertising revenue to fund their operations. Since advertising can be lumpy depending on the strength or weakness of the U.S. economy, it can lead to wild fluctuations in the performance of these underlying business models.
Sirius XM's business model is predominantly subscription-driven. In the first quarter, $1.078 billion of its $1.294 billion in sales was generated from subscriptions, with only $36 million coming from advertising revenue and $29.7 million from equipment revenue. What's more, the company grew its net subscribership by 259,000 people to approximately 31.6 million in Q1.
Sirius XM's costs are also very predictable because of its business model. Since it's the only company to have a radio satellite system in orbit, and the costs to operate these satellites is fixed regardless of its subscriber count, its only variable costs tend to be its general and administrative expenses, and the contracts it negotiates with its on-air talent. As it gains subscribers over time, Sirius XM's margins should improve given its predictable satellite costs.
Partnerships have also been an important growth driver for Sirius XM (and partners aren't hard to find when you're the only true satellite play in town). In addition to popular on-air talent like Howard Stern, Sirius XM has a six-year deal with the National Football League in place. The NFL remains the most popular sport in America.
You'll struggle to find a business model that's more geared for long-term success than that of Sirius XM.
This kingdom has a magical moat
Keith Noonan (Disney): It's almost difficult to conceptualize just how many potent entertainment properties Disney has under its wing. There are far too many to list here, but, between Star Wars, Marvel, the Pixar catalog, Mickey Mouse and friends, Disney Princesses, and a treasure trove of classic films that are ripe for cinematic revival, no other company even comes close to matching the House of Mouse when it comes to valuable characters and franchises. Heck, even Indiana Jones is a member of the Magic Kingdom, with the character set to once again grace the big screen for a 2020 film.
It's sometimes said, only half jokingly, that Disney "owns your childhood." Believe it or not, there are still big entertainment properties that the company doesn't lay claim to, but having so many great characters and stories under one corporate roof has created huge business advantages. Beyond giving the company an edge at the box office (last year saw the company set a new record for global ticket sales), its incredible stable of properties also drive performance at its theme parks, consumer products, and media networks segments. Big hits like Frozen and Zootopia will encourage park traffic for decades to come, and last year saw Disney-licensed merchandise generate $56.6 billion in retail sales -- roughly $34 billion more than the next largest licensor.
Disney's incredible catalog of entertainment properties and synergies across its segments give the company a wide moat, and it's likely that its kingdom will be continue to be magical for years to come.
Strategically positioned to grow
Matt DiLallo (Williams Partners): Natural gas pipeline and processing giant Williams Partners operates several major energy infrastructure networks throughout the country. However, none is more important than the Transco interstate gas pipeline system that runs along the East Coast going from New York City all the way to the Gulf Coast. That strategic location serving the fastest growing demand centers for gas is a massive competitive advantage because it provides the company with unparalleled growth opportunities.
For example, 54 of the 88 new natural gas power plant projects in development are along the Transco corridor and will need access to a steady supply of gas. That's in addition to six natural gas export facilities that are under construction, and 50 large industrial projects that will be significant consumers of gas. The expected surge in gas demand from these projects is already fueling a slew of expansions to the Transco system. Williams has $7 billion of high-return projects underway, which it should complete over the next few years. Once fully operational these projects should supply it with $1.15 billion of annual EBITDA, which is quite a lift for a company that currently generates about $4.35 billion in EBITDA each year. Meanwhile, the company is in talks with customers on more than 20 additional projects to expand its system so it can help meet growing gas demand.
Those incremental earnings drive Williams Partners' expectations that it can increase its distribution to investors by a 5% to 7% annual rate over the next several years. That's pretty healthy income growth for such a low-risk investment, all made possible by controlling the best-placed asset in the highest growth natural gas transportation corridor in the country.