Warren Buffett's holding company, Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B), has enjoyed an average annual return of 20% since 1965 compared to the S&P 500's average of just 10% over that same period. He's pulled this off by betting on companies with strong economic moats, which is their ability to maintain an edge over rivals.
At first glance, it's hard to see RH's competitive advantage. As a home furniture store, its products aren't super differentiated from rivals'. But RH created a moat for itself by carefully curating a luxury-oriented brand identity. This transformational strategy can boost profits and keep competition at bay.
Never underestimate the power of a luxury brand. People are willing to pay big bucks to stand out, which is great news for luxury companies, which often enjoy outsized margins and sustained growth.
Led by CEO Gary Friedman, RH has carefully upgraded its image by locating its showrooms in prime locations and anchoring them with synergistic experiences that include hospitality and dining. The company has also expanded into related businesses like interior design.
First-quarter revenue jumped 78% year over year to $861 million, and the luxury transformation is already showing results. According to management, RH's adjusted operating margin of 21.8% has eclipsed that of LVMH (the parent of Louis Vuitton). And the company is on track to achieving operating margins above 25% in the coming years.
With a forward price-to-earnings (P/E) multiple of 31, RH trades at a healthy premium over other furniture stores like Ethan Allen Interiors and Home Depot, valued at 10 and 24 times forward earnings, respectively. But you often get what you pay for in the stock market, and RH's strong moat and growing margins help justify its price tag.
With a monopoly on satellite radio services, Sirius XM has a rock-solid moat. And while the company faces competition from terrestrial radio, it's hard to match its ad-free format and library of exclusive content. Sirius' business is mature, so don't expect breakneck growth, but its healthy bottom line and pivot to synergistic opportunities could leave investors smiling all the way to the bank.
Sirius' performance depends on the automotive industry, where it boasts an installation rate of 82% in new cars. And despite some supply-side challenges related to the semiconductor chip shortage, auto sales have rebounded tremendously in 2021, boosting the company's results.
First-quarter revenue jumped 15% year over year to $2.16 billion, and net income increased from $243 million to $433 million (partially due to a $140 million insurance payout). Sirius' advertising business performed particularly well -- jumping 82% to $429 million in the period. And the 2020 acquisitions of podcasting platforms Stitcher and Simplecast should help it maintain its momentum in this opportunity (podcasts are often monetized through ads).
Management expects revenue of $8.55 billion and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $2.68 billion in the full year 2021 (up 6% and 4%, respectively). With a market cap of $25 billion, Sirius trades at around nine times its projected EBITDA, which looks fair considering its strong moat and growth opportunity in advertising. The company aims to return value to investors through a buyback program with $748 million currently authorized.
Investing like Warren Buffett
Buffett built his fortune by investing in easy-to-understand businesses with clear advantages over their rivals. RH and Sirius XM fit the bill due to their economic moats in luxury furniture retail and satellite radio. But RH is a better pick for investors willing to pay a premium for better growth potential, while Sirius XM is a more mature business that returns value through its stable bottom line and buyback program.