The Coca-Cola Company (KO), IHS Inc. (IHS), Gartner Inc (IT): Avoid This Vanishing Moat

However, IHS also competes with more generalized data sources like Thomson Reuters Corporation (USA) (NYSE:TRI). Thomson Reuters’ data offering rivals the breadth of IHS and Dun & Bradstreet Corp (NYSE:DNB). Like IHS, Thomson Reuters has significant operating leverage due to its reliance on data, so margins can easily expand with sales growth. Also like IHS, Thomson Reuters derives the vast majority of its revenues from subscriptions — a recurring revenue source.

Thomson Reuters Corporation (USA) (NYSE:TRI) is focused on financial market data, which is not a core focus of IHS. But it is an important comparable because, although it has a tremendous breadth of proprietary data, it earns mid-single-digit returns on invested capital — not unlike IHS’s ROIC over the last two years. This is a sign that shareholders can count on lower ROIC in the future than what IHS had traditionally earned in the past.

Bottom line

IHS is not a wide-moat company anymore, so it should not trade like one. The high end of management guidance for 2013 is $4.43 earnings per share. Let’s round that up to $4.50. The stock currently trades in the mid-$90s per share, which is the same as roughly a 4.7% earnings yield.

In a low interest-rate environment, it is understandable why someone would require only a 4.7% yield on a wide-moat stock. But IHS is not a wide-moat stock anymore — it should trade much lower.

The article Avoid This Vanishing Moat originally appeared on Fool.com.

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