Moreover, Ford Motor Company (NYSE:F)’s market share has dropped precipitously over the last decade; it had close to a 25% share in 2000 and now has a 15% share. A company losing market share is, by definition, without a competitive advantage.
Contrast Ford Motor Company (NYSE:F)’s results with those of Coca-Cola and The Western Union Company (NYSE:WU). For each dollar these companies have invested, they earn about $0.22 in profit. In other words, these companies earn Warren Buffett-like returns on investment. They may not be engaged in the process of buying great companies at low prices, but the businesses they are engaged in allow them to earn the same returns as if they simply handed their money to Buffett to manage.
Meanwhile, The Coca-Cola Company (NYSE:KO) has maintained a 40% share of its market for at least a decade — and that share may grow as PepsiCo diverts more of its attention to its snacks division and less dollars are invested in its carbonated soft drink business.
The Western Union Company (NYSE:WU), too, has maintained its competitive position despite periodic assaults by its smaller rival, MoneyGram. Western Union’s 500,000+ agents is significantly more than MoneyGram has. Agents have a strong incentive to stick with one company because recurring customers expect to be able to send money to the same endpoint each time they use the service. So a Western Union agent would not risk switching over to MoneyGram because he would lose all of the endpoints where MoneyGram and The Western Union Company (NYSE:WU) do not overlap. This results in captive agents, which secures Western Union’s position as the preeminent cash transfer company.
The Coca-Cola Company (NYSE:KO) has enormous brand equity and an unreplicable global distribution network. The Western Union Company (NYSE:WU) has an unmatchable network of agents on the ground in some of the most remote places in the world. These companies will continue to earn outsized profits decades into the future, even as competitors try their best to steal market share. That’s because Coca-Cola and Western Union have durable competitive advantages.
Bottom line
The two dead giveaways of a durable competitive advantage are high returns on capital and stable market share. The Coca-Cola Company (NYSE:KO) and The Western Union Company (NYSE:WU) exhibit these attributes, while Ford Motor Company (NYSE:F) does not. Although a deeper inspection of the businesses is warranted in order to make a final assessment of the durability of a competitive advantage, these two factors are near impossible to maintain without one.
Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends The Coca-Cola Company (NYSE:KO), Ford, and The Western Union Company (NYSE:WU). The Motley Fool owns shares of Ford Motor Company (NYSE:F).
The article Two Metrics That Will Boost Your Investment Returns originally appeared on Fool.com.
Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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