Warren Buffett is widely considered to be one of the best investors of all time. He has produced consistent market-beating returns over the past seven decades, creating a tremendous amount of wealth for himself and his investors along the way.
Buffett’s investment style focuses on buying high-quality businesses at attractive prices. He looks for companies that have a definite competitive advantage, such as a good brand or reputation that have fallen on hard times, which he can snap up at a discount price.
With that in mind, here are two FTSE 100 companies with substantial competitive advantages that currently appear to be on sale.
Spirax-Sarco Engineering
Recent trading updates from engineering group Spirax-Sarco Engineering (LSE: SPX) have been disappointing. Global economic uncertainty has caused the company’s customers to take a more cautious approach to capital spending and, as a result, Spirax’s sales have taken a hit.
Nevertheless, the company remains a global leader in the production of commercial steam systems. Spirax has been in this business since the 1950s, which gives the company a big competitive advantage over peers. Because steam systems are a critical function, which can be highly dangerous if not managed correctly, Spirax’s reputation is its competitive advantage.
Clients are unlikely to go anywhere else just because they can get a better price when safety is paramount. That’s why the company can command profit margins of up to 25%.
It’s also cash generative and has a strong balance sheet, two factors which should help the business weather the current global economic slowdown.
As such, now could be an excellent time to buy a share of this highly respected engineer. The company’s price-to-earnings (P/E) ratio of 34 might look expensive at first, but this seems to be a fair price to pay for Spirax’s experience, reputation and profitability.
Rentokil Initial
Pest control isn’t a particularly glamorous business, but it’s certainly an essential one, and Rentokil Initial (LSE: RTO) is one of the largest sector groups in the world.
The company has been capitalising on its position in the market recently by using its scale to snap up smaller competitors in a highly fragmented market. Earnings per share growth of nearly 100% over the past seven years suggest the group is quite good at following this strategy.
The group’s sales could also see a boost from global warming. Rising temperatures have led to an increase in rodent populations, which is good news for an enterprise that has become synonymous with pest control over the past decade or so. This is the company’s primary competitive advantage. Rentokil’s international presence gives it an edge over smaller peers with customers.
Looking at the company’s valuation, a P/E of 31 suggests the stock is a bit expensive at current levels. But considering Rentokil’s historical growth rate and market opportunities, the firm’s bright growth outlook appears to justify this valuation.
