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Intangible Assets Are The Leading Source Of Moats

Jul. 04, 2017 2:01 PM ETMOAT, MOTI, BMY, LOW, BAYRY, CCL
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"How Moats Translate into Sustainable Competitive Advantages" is a five-part moat investing education series that explores the primary sources of economic moats. The idea of an economic moat refers to how likely a company is to keep competitors at bay for an extended period. According to Morningstar Equity Research, there are five key attributes that can give companies economic moats, and which are viewed as sources of sustainable competitive advantages: 1) Network Effect, 2) Intangible Assets, 3) Cost Advantage, 4) Switching Costs, and 5) Efficient Scale. Here we explore the concept of "Intangible Assets."

Intangible Assets Help Build Strong, Identifiable Advantages

Although not always easy to quantify, intangible assets are one of the primary sources of strong competitive advantages for businesses and a key source of economic moats. Intangible assets can include corporate intellectual property, such as patents, trademarks, copyrights, government licenses, and business methodologies. Intangible assets help companies to safeguard key competitive advantages. Companies can use patents, for instance, to protect inventions from unauthorized commercial usage by competitors. Like patents, government licenses also raise the entry hurdles for new competitors.

A company's reputation, often measured by goodwill and brand recognition, is also considered an intangible asset. Brand identities play a key role in helping companies to stay ahead of competitors, and simply put, a positive brand promotes sales, builds trust, and inspires customer loyalty.

According to Morningstar equity research, nearly 60% of its domestic and international moat-rated companies have achieved this recognition because of intangible assets defined by Morningstar Research as:

Intangible Assets. Patents, brands, regulatory licenses, and other intangible assets can prevent competitors from duplicating a company's products, or allow the company to charge a significant price premium. For example, patents protect the excess returns of pharmaceutical manufacturers such as Novartis NVS. When patents expire, generic competition can quickly push the prices of drugs down 80% or

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