This 54min webinar is worth listening to:
I have a lot of time for Keith. I used to read Analyst back in the day and leant a lot from what he wrote.
Keith took questions from listeners, and a good question at 35m40s was raised about Softcat – “does it have an obvious moat?”.
Keith referred to SCT’s return on equity, cash generation, organic growth, margin development and going from 9th to 2nd within its industry. He therefore claimed the business must have “something special” and enjoy a “different type of moat” to the traditional patents/brands etc enjoyed by the likes of Rotork, Games Workshop, etc.
Keith did not mention SCT’s margin, which for the last two years was 8.5%:
So not exactly Buffett-type ‘franchise’ profitability.
A skim of the 2019 annual report reveals staff are all-important:
So: can staff ‘culture’ ever create a sustainable moat? Keith seems to think so, at least at SCT.
Mind you, there are many ‘people’ businesses with high ROEs etc where perhaps the moat is not very sustainable.
I had a good feeling about SCT back in January 2017 where the shares were 300p: Maynard Paton | Softcat: 44 Consecutive Quarters Of Organic Profit Growth
"There is a lot to like about SCT, not least its splendid track record, the owner-friendly boss, the reassuring cash hoard and the wonderful return on equity numbers.
True, there is no obvious ‘intellectual property’ here to keep rivals at bay.
Reselling products from the likes of Microsoft and Cisco will never earn anyone much money, but I guess bundling them all together within an associated IT service can be more lucrative.
Mind you, what is clear from SCT’s annual reports is the group’s belief that top-notch employee happiness leads to first-class customer service, which in turn can lead to superior financial progress.
Empowered workers are not exactly a textbook ‘moat’, but SCT’s financial history is very tough to criticise. So perhaps a vibrant employee culture really can be difficult to replicate and therefore can create a sustainable competitive advantage."
Obviously in hindsight I should not have quibbled about the then 15-16x P/E and instead backed SCT’s “vibrant culture”.
Perhaps there is more to moats than the conventional advantages of ‘network effects’, patents and so on.
Your thoughts are welcome.