Monopolies can be bad. Having a single company control every aspect of an entire industry is likely to lead to higher consumer prices, slower innovation, and anticompetitive behavior.
Luckily for us, true monopolies are rare, and the business conditions in a near-monopoly often trigger lots of healthy competition and fresh thinking. And either way, both industry-dominating businesses and true monopolists are fantastically profitable.
That's why we asked a handful of investors here at The Motley Fool if they had seen any monopoly stocks in today's market. Read on to see how they dug up Intuitive Surgical (ISRG 0.70%), LendingTree (TREE 2.81%), and Canadian National Railway (CNI +2.84%).
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A loan paid back with interest
Demitri Kalogeropoulos (LendingTree): LendingTree is an overnight success that was just 19 years in the making. Since launching in 1998, it has survived both the tech bubble collapse and the housing market crisis to emerge as the leading platform connecting consumers seeking loans with banks that have excess cash to lend.
Until recently, those credit instruments were mainly mortgage related. But LendingTree's expansion into unsecured debt such as auto, credit card, and personal loans has helped spark big sales gains. Revenue is up 61% over the last nine months as an 81% spike in the non-mortgage segment pushed it up to 57% of the business from 43% in last year's third quarter. LendingTree's diversification strategy is giving it a far broader customer base, and that includes the 6.5 million users it has added just since launching its credit score platform in mid-2014.
Meanwhile, the core business continues to deliver market share gains as consumers move their mortgage shopping online. Its purchase and refinancing revenues rose 38% last quarter despite a 16% contraction in the broader industry.
Investors are being asked to pay up for all of that operating success. LendingTree's P/E ratio is now well over 100, after all, and the stock has nearly tripled in 2017. To earn that premium, this Wall Street favorite will need to keep posting improvements across its debt offerings and deliver accelerating sales and profitability gains in 2018.
A geographic monopoly that manufactures per-share growth
Tyler Crowe (Canadian National Railway): Railways have several things working in their favor that give them monopoly characteristics. The first and most obvious is cost. Rail is by far the most efficient method to move goods over long land distances. Revenue per ton-mile via rail is one quarter that of via truck, and less than 5% that of via air carrier. That makes rail the method of choice for any bulk item or long-distance shipping in North America. Then, there is the geographic monopoly rail companies enjoy. There are large swaths of North America that are serviced by only one or two railway companies, which gives those railways an established customer base with little to no competition.
When you think about railways in North America, though, growth probably doesn't come up much. If you look at Canadian National Railway's earnings-per-share growth, though, you might reconsider your position. Over the past decade, the company has only grown revenue by 33%. Nothing to write home about.
However, that monopoly position means the company throws off incredible amounts of free cash flow that management has consistently used to pay dividends and buy back shares. Management has brought back enough stock such that earnings per share has grown 91% over that time period.
CNI Revenue (TTM) data by YCharts.
Canadian National's revenue or net income growth over a year or so is never going to knock an investor's socks off. Over time, though, the company's modest organic growth coupled with persistent reductions in shares outstanding is an incredible recipe for generating returns over the long haul that is the recipe for generating investor wealth.
Domo arigato, mister roboto
Anders Bylund (Intuitive Surgical): Monopolies are rare these days. Pretty much any viable business quickly finds plenty of competition. In my eyes, the closest thing to an actual monopoly today is the da Vinci robotic surgery system and its inventor, Intuitive Surgical. It's the only medical stock I own; let me tell you why.
For years, Intuitive defended its unique surgery system through aggressive patent claims and a tendency to buy out potential rivals before they posed a serious threat. That stage segued into a few years of quiet growth, where the competition acted as if robotic surgery wasn't a thing and shouldn't be given any attention. Now, Intuitive has proven its mettle and is bracing for a fresh influx of surgical robotics innovation.
In the words of Intuitive Surgical's management, this is a natural evolution of the market.
"After initially dismissing the power of computation and robotics in surgery, some large and small companies have pledged their entry into the field," the company stated in its 2016 annual report. "Additional competition into these markets is inevitable and validates the pioneering work we have led for years. We anticipated this increase in competitive activity and do not take it lightly."
The list of new names in Intuitive Surgical's chosen area of expertise is a who's-who of the medical and technology sectors. However, Intuitive Surgical has grown into a large-cap titan of industry itself, perfectly capable of fighting back through innovation and smart spending. For instance, the company has put together a brand-new flexible surgery platform that's made for hard-to-reach parts of the human body, and that system is winding its way toward FDA approvals.
In the last three years, Intuitive Surgical's free cash flows have grown 64% larger, while annual sales increased by 40%. Stock prices more than doubled over the same period. And the company's minimally invasive surgery systems should see more use, more demand, and more sales over the next couple of decades. Baby boomers aren't getting any younger, and more than 15% of the American population has passed their 65th birthdays.
So, we're looking at almost guaranteed business growth for the long haul, protected by a near-monopolistic combination of technology patents and continuing innovation.
