How can you price in a company’s moat?

In this post we’ll go through the process of pricing in a company’s moat using pevaluator.

For a description of what an economic moat is, you can check out this post.

1. Rate company moats

pevaluator allows users to rate companies’ moats. Since this is a subjective measure, there’s no single way to rate this other than doing research and gaining insight into competitive advantages. Having an area of expertise can make this process easier. For example, if one’s a software engineer, they can probably intuitively rate the moats of companies in the IT sector.

To begin rating, head over to the “My Market” page and select moat.

You can add tickers to the list and adjust the sliders to give each company a relative moat rating.

2. Add a moat modifier

In the “My Market” page, under “My market model”, you can choose the Moat metric and specify the premium you’re willing to pay for a wide moat.

For illustrative purposes, we’ve chosen a couple of metrics and weighed them low, as well as “Moat”, to which we’ve applied a 100% premium.

3. Get valuations

As we’ve rated Coca-Cola with a wider moat than Pepsi (which still has a wide moat itself), we can see that we’ve got a higher fair P/E for Coca-Cola.

In practice, we care about multiple metrics and would weigh them differently.

If for example we want to weigh revenue growth more (which is expected to be higher for Pepsi) and Moat less, the target P/E and associated valuations might be inversed.

We now have a market model that includes user-defined moat ratings.

Our valuations now take into account tangible & intangible competitive advantages!