…well, I was asking about more about the propriety of their systems, or in “Fool speak” what sort of ‘moat’ does the company have?..
huibs, the difficulty we are having is in our understanding of “moats.” The expression comes from a strong metaphor: “How to defend a castle? With a wide moat filled with water and hungry alligators.” Depending on our tolerance for risk, investors are willing to live with stronger of weaker defenses. The moat need not be patents or trade secrets, it could be a brand name. Brand names are often dismissed as non-moats but that is a matter of opinion only. But I do grant that a brand name is not as strong a moat as a network effect, a brand name (Coke) will not create “increasing returns” the way a network effect (PriceLine) does. A network effect is something quite intangible, hardly an earthworks moat.
“Core competence” is one of these intangible moats that a lot of investors ignore. Geoffrey Moore wrote about it in: Living On The Fault Line. From an Amazon book review:
Chapter 2 explores the second important idea, the CORE-CONTEXT distinction. Here Core is defined as those activities which are central to the company’s marketplace differentiation: effective action here directly impacts the share price. Context activities are those which need to be done, and done well, but which the market gives you little credit for. [emphasis added]
http://www.amazon.com/review/R28WYI1IA7PUSN/ref=cm_cr_rdp_pe…
My favorite example is that clean restrooms are core for Fuller and context for MacDonald’s. BMS is core for ProFire but context for most other oil and gas service providers. My contention is that ProFire found an under-served niche and made it their core business. Only time will tell how well they do but revenue growth indicates that they are on the right track.
What is an economic moat?
The term economic moat, coined and popularized by Warren Buffett, refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. Remember that a competitive advantage is essentially any factor that allows a company to provide a good or service that is similar to those offered by its competitors and, at the same time, outperform those competitors in profits. A good example of a competitive advantage would be a low-cost advantage, such as cheap access to raw materials. Very successful investors such as Buffett have been very adept at finding companies with solid economic moats but relatively low share prices. (To read more, see Competitive Advantage Counts.)
One of the basic tenets of modern economics, however, is that given time, competition will erode any competitive advantages enjoyed by a firm. This effect occurs because once a firm establishes competitive advantages, its superior operations generate boosted profits for itself, thus providing a strong incentive for competing firms to duplicate the methods of the leading firm or find even better operating methods. (For further reading, check out the Economics Basics Tutorial.) [emphasis added]
http://www.investopedia.com/ask/answers/05/economicmoat.asp
The issue of competition is an important one. A product or service that has a network effect protecting it can endure for a long time and belongs to the category of “increasing returns.” BMS is not in that category, it belongs in the “decreasing returns” category because its moat is not truly excluding. Don’t expect the share price of PFIE to rise like PCLN. But for a time it will outperform the market, for the time it takes competitors to get on the bandwagon. A great example is International Rectifier Corporation (IRF). They sell electric components that are essentially commodities. But from 1997 to 2000 you could have made a killing, from $5 to $50. Not only had the price collapsed but they came out with some advanced components that took the competition some time to duplicate.
http://invest.kleinnet.com/bmw1/stats25/IRF.html
What does all of the above add up to? That PFIE should make a great investment for a time, depending on how they execute and how competitors react. Sorry, it’s not rocket science!
Denny Schlesinger
huibs…