Bloom Energy’s “Time-to-Power” Moat

Jon Quast (0:02)

Does Bloom Energy have a competitive advantage? Motley Fool Hidden Gems Investing starts now.

Welcome to Motley Fool Hidden Gems Investing. I'm your host today, Jon Quast, and today is Labor Day, which means that we're not covering a lot of news. We're actually going to triple dip into our mailbag today with our guests, Matt Frankel and Rachel Warren.

And I'm just going to go right into it. So here is the first mailbag question that we have for you today. And this comes from Sabir. He says that he lives in Austin and is a regular listener of the podcast. And this question is for anyone. While comparing company stocks, are there metrics that speak to the underlying structure of a business, which potentially might suggest how much they would return to their investors over time? For example, Coca-Cola has higher return on invested capital than S&P Global and WM, but it hasn't returned nearly as much historically with dividends reinvested. So I don't know if ROIC is the right metric to monitor, or if I should compare these businesses at all, since they are in separate sectors. But to include one in my portfolio, I need to make assumptions about how much my money would grow if I had invested in each of them. Thanks for the amazing content. Please keep doing the same forever. Okay, Matt, this is essentially a question about ROIC or return on invested capital. And is this the magic bullet that we need to screen for to find the stocks that are going to make us money over the long term?

Matt Frankel (1:42)

I mean, first of all, I don't think you'll go wrong with any of these capital-efficient businesses that you mentioned.

But, you know, ROIC, it's only one piece of the puzzle. It depends whether the company can reinvest those high returns on capital in efficient ways to grow its business. This is the big limiting factor for Coca-Cola, just to name one of the examples you just did. So it doesn't have as many places to reinvest into its business. It's a massive company. It already has its distribution network. It's already everywhere. And that's why it distributes so much of its returns as dividends instead of reinvesting into the business.

Jon Quast (2:16)

Yeah, it reminds me of Warren Buffett talking about his Seas Candy business. The returns are great, but there's not a lot of places to reinvest that money into Seas. So it winds up just kind of taking that money and reinvesting it elsewhere. But Rachel, are Sabeer's instincts right here because he's wondering if he should even compare these businesses since they're in different sectors. I mean, Coca-Cola, S&P Global, this is the stock exchange, waste management, this is trash.

They're not in the same place of doing business. So is he right to say maybe I shouldn't be comparing these?

Rachel Warren (2:48)

I mean, yeah, these are businesses that are operating in very different landscapes. And I do think there are certain growth factors and you can compare them in the context of what you're looking at for your specific portfolio.

And ROIC is one, I think, very important metric when you're evaluating businesses that you want to buy and hold for the long run. But I think that it's just one of many tools that you should have in your toolkit when you're trying to look at how a business protects and handles its cash. And free cash flow conversion is another very important one. I mean, this tells you really how much of every dollar in revenue turns into cash after a company addresses its liabilities and continues to maintain its operations. And it's important to look at a wide range of factors like this, because, for example, a company can have a very high return on capital on paper, but if that profit doesn't convert into actual free cash flow, it can't be returned to you, the shareholder. So ROIC is great, but it should just be one of many tools you use when you're evaluating businesses, in my view.

Jon Quast (3:52)

And Matt, you mentioned that the limiting factor here with Coca-Cola is just not really having too many places to put that money to reinvest for good returns. But what about the other two here that you mentioned, SPGI and Waste Management?

Matt Frankel (4:05)

Yeah, they both have had far more opportunities to reinvest. Even Waste Management, which a lot of people think of as a boring, mature business, I mean, they're not everywhere. They've been investing in growing out their footprint. They've been investing in the latest recycling technologies.

There have been a lot of investment opportunities. SPG Global, I mean, they reinvest in building out their data assets and new indices and that ROIC helps compound the business's intrinsic value over time. That's the big difference here.