It is our pleasure to bring you the following interview with Allan Mecham, portfolio manager and partner at Arlington Value Capital, based in Salt Lake City, Utah.
MOI Global: What sources of competitive advantage have you found to be most durable?
I like the hourglass model, where a distributor stands in the middle of fragmented markets. That model allows a well-managed distributor to enjoy strong bargaining power in both buying and selling while occupying a niche that’s valuable to customers and difficult for competitors to dislodge.
Allan Mecham: That’s a good question. Many low-priced consumer brands jump out for having impressive, long-running histories. Low cost operators with economies of scale always catch my eye, and if well run, can enjoy an enduring moat. Businesses selling a product or service that’s mission critical and yet is a small fraction of total costs, like you find in some aerospace businesses – or rating agencies in some ways – are interesting, with long-lived advantages due to high switching costs. I’ve also been attracted to auction related businesses – with network effects – which tend to have attractive economics and powerful moats. I think your question about durability is important. In my view, the durability of economics and earnings power is the critical factor for valuation integrity. Corporate lifespans serve as a good reminder that competitive destruction is a healthy part of capitalism and highlights the value of humility when searching for durable businesses.
MOI: You have shown an apparent affinity for distribution-related businesses (e.g., DNOW, MSM, CHEF). What do you find particularly attractive about the business models and long-term competitive positioning of such companies?
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