The concept of the ‘economic moat’ or competitiveness or competitive advantage is essential, not only in Morningstar’s qualitative determination of the attractiveness to invest in a company, but also in the valuation process. Morningstar uses three evaluations of this competitive advantage: none, narrow and wide.
There are two important conditions for a company to obtain a narrow or wide evaluation of its competitiveness. First of all, the prospect of obtaining a more than average yield on capital and secondly a competitive advantage that protects and sustains this yield in the long term.
Competition usually lowers the profit. But companies that are able to sustain their profit over a long period because they have been able to create a competitive advantage, have a ‘moat’. We consider these companies superior investments.