When we talk about a company having a “moat” we’re referring to the competitive dynamics that reduce the ability for competitors to come in and steal profits. Arif wrote about this concept in depth in a recent post.

On their earnings call yesterday, our portfolio holding TransDigm Group (TDG), which sells airplane parts, was asked about the long-term defensibility of their moat. Their answer illustrates very well the sort of situation we look for in companies we add to our portfolio.

“If TransDigm went bankrupt and died and all our plants caught on fire, ultimately the airline industry would find a way to survive. So, it’s not that there is no way to get around us. But there is a significant entry barrier, there is a significant cost, there is a significant qualification.

There is also the issue that we own the IP [intellectual property], so you got to find the way around that. It’s a substantive barrier that we frankly have not seen any material change in. Now, is it impossible? If you don’t care about the costs, you can always find the way around most anything. But I don’t see any fundamental change in the switching cost characteristics here.”

As management points out, it certainly isn’t impossible for competitors to go after TransDigm’s business. But there are numerous barriers that make doing so difficult.

Ensemble Capital’s clients own shares of TransDigm Group (TDG).

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