Author: Todd Campbell | July 31, 2018
Near-monopoly investing opportunities
When a company exclusively controls the supply or trade of a product or service, it’s called a monopoly, and because monopolies can increase prices without losing market share, the Federal Trade Commission is tasked with preventing them from forming. Although pure monopolies are illegal, there are some near-monopolies that are the result of government policies and consumer behavior. Because near-monopolies have more pricing power than they’d have otherwise, they can be smart investments. Read on to find out if these near-monopolies ought to be in your portfolio.
Big tobacco is still big business
Regulation, legislation, taxation, and lawsuits have made it so that only the biggest tobacco companies can survive, and when it comes to big tobacco in the U.S., no one is bigger than Altria (NYSE: MO), the maker of Marlboro cigarettes.
Altria’s U.S. share
of the cigarette market is 50.7%, and in 2017, it reported $25.6 billion in
revenue and net earnings of $10.2 billion. In the past, Altria’s
used its profitability to diversify into beer and wine, but lately, it’s investing in
e-cigarettes. As a result, volume
for its MarkTen e-cigarette brand grew 60% in 2017.
Odds are that cigarette
use will continue dropping, but Altria’s market position gives it pricing power,
and that should allow it to continue paying investors a Treasury-trouncing
dividend. As of July, its shares were yielding 4.8%.
Powering up portfolios with utilities
Building a power utility is so expensive that states have allowed utilities to operate as near-monopolies for decades. For instance, Duke Energy (NYSE: DUK) is one of the biggest utilities in the country and 40% of its customers are in North Carolina, where the company’s market share is about 95%.
Duke Energy’s prices are regulated by the states it operates in, but historically, these regulators have approved reasonable, regular increases that provide consistent revenue and profit growth. In 2017, Duke Energy’s operating revenue and net income were $23.6 billion and $3.1 billion in 2017, respectively.Some states have opened their power markets to third-party competition, but that hasn’t happened in North Carolina, and even if it does, Duke Energy will still own the transmission lines, so it won’t be left out in the cold.
Riding the rails
It’s true that railroads compete with trucks, planes, and boats for shipments, but most railroads make their money by transporting commodities like coal that are hard or expensive to transport by other methods.
In the past, railroads were highly regulated; however, regulations have been easing since the 1970s, and that’s allowed railroad companies to exit unprofitable lines, boost prices, and merge together. As a result, the U.S. railroad market is highly-profitable and dominated by big companies with near-monopolies.
For instance, Norfolk Southern's (NYSE: NSC) only major competition in the eastern U.S. is CSX Corporation (NASDAQ: CSX) and Burlington Northern, a Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK-B) company, is Union Pacific’s (NYSE: UNP) only major competitor in the western United States.Those four railroads recorded over $60 billion in combined profit-friendly revenue in 2017 and absent a recession that derails demand for commodities, it’s likely the industry's revenue will continue to climb.
Tune into profits
Cable companies compete against wireless, fiber, and satellite for television, phone, and consumer services, but despite that competition, cable operators still benefit from near-monopolies in many markets due to massive investments in infrastructure.Comcast (NYSE: CMCSA) is one of the biggest cable companies in the U.S., and despite the availability of other options, it still added over 200,000 new subscribers last year and it serves nearly 30 million people this year. In 2017, its sales grew 5.1% to $84.5 billion and its adjusted earnings per share grew 18.4% to $2.06.
New technologies could
emerge that cause Comcast to lose customers. But advances, including 1 gigabit
download speeds and its acquisition of NBCUniversal in 2013, should help
insulate it against that risk.
Turning trash into treasure
The waste disposal market is more fragmented than in the past, but Waste Management (NYSE: WM) still wields considerable might.
The company’s municipal waste disposal contracts give it market exclusivity for three to eight years and because it owns landfills that competitors have to use to dispose of their trash, it profits from charging them tipping fees.Last year, Waste Management’s price and volume increases led to sales growing to $14.5 billion from $13.6 billion and adjusted earnings per diluted share growing to $3.22 from $2.91 in 2016. Because the amount of waste increases alongside a growing economy and population growth, Waste Management’s financial results could be even better in the future.
A gaming and business software Goliath
The market for video game consoles is dominated by three players: Microsoft (NASDAQ: MSFT), Sony (NYSE: SNE), and Nintendo, and last year, video game hardware sales grew 19% year over year to $6.9 billion, according to NPD.
A 40% plus market share makes Sony’s PlayStation 4 the best selling game console, but Microsoft’s been selling over 8 million Xbox One’s per year since 2015, and its 18% market share isn’t shabby. Because the two companies account for the bulk of console sales, they’ve largely avoided a price war by tweaking features and performance and establishing gaming ecosystems that keep gamers from switching systems.
The console market isn’t Microsoft’s only
near-monopoly, though. It’s also got a near-monopoly in operating system
software and productivity tools software. Its Windows software is used on 84%
of desktop PCs, and thanks to Office and Office 365, it captures the lion’s
share of the $15 billion per year that’s spent by businesses on productivity tools.
A rare disease powerhouse
Developing new medicines can take years and hundreds of millions of dollars, so when drugmakers like Vertex Pharmaceuticals (NASDAQ: VRTX) succeed, they enjoy near-monopoly benefits from patents that protect their drugs from generic competition for years. This patent protection is particularly lucrative for drugs developed to treat rare diseases, such as cystic fibrosis, with few treatment options.Currently, Vertex Pharmaceuticals is the only company marketing FDA-approved drugs that treat the cause of cystic fibrosis rather than its symptoms. Its cystic fibrosis drugs tinker with genes to restore their proper function and although its medications only address mutations found in about 30,000 people, new combination drugs in development could help nearly 68,000 patients someday. In 2017, the company’s revenue was $2.5 billion, up 45% from 2016.
Eventually, competitors could develop their own treatments but for now, Vertex Pharmaceuticals has this market all to itself.
The robot that’s transforming surgery
When Intuitive Surgical’s (NASDAQ: ISRG) da Vinci robotic surgery system was introduced in 2000, most surgeons scoffed, but today, da Vinci robots are helping surgeons safely perform hundreds of thousands of surgeries every year.
With over 4,500 systems
installed at hospitals worldwide, Intuitive Surgical is by far the biggest
robotic surgery player. As more systems are installed, it's driving demand for proprietary instruments and accessories necessary
for every da Vinci surgery. The company’s sales were $3.1 billion, up from $2.7
billion in 2016, and as new technology allows da Vinci’s use in more
interventions, its near-monopoly should continue driving revenue and profit
Competitors, including a joint venture between Alphabet (NYSE: GOOG) (NASDAQ: GOOGL) and Johnson & Johnson (NYSE: JNJ), could challenge Intuitive Surgical at some point, but Intuitive Surgical’s massive head start puts it an envy-inspiring market position.
Soaring thanks to search
Best-known by its previous name, Google, Alphabet’s focus on simplicity and speed has given it a near-monopoly in Internet search. Every second, there are over 40,000 searches processed by Google, and according to Statista, Alphabet’s U.S. search market share is an eye-popping 63.5%.
Leveraging all those searches to create revenue opportunities has turned Alphabet into one of the world’s largest technology companies. Its sales were $110.9 billion last year, up 23% year over year.
Advertising revenue powered by search will be the big driver of future revenue for a while, but the company’s goal is to leverage sales growth to develop new solutions that disrupt other markets, too.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Todd Campbell owns shares of Alphabet (C shares) and Microsoft. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Intuitive Surgical. The Motley Fool owns shares of Johnson & Johnson and has the following options: short October 2018 $135 calls on Johnson & Johnson. The Motley Fool recommends Berkshire Hathaway (B shares) and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.