Own The Toll Booths – Part 2

In my first toll booth article, found here, I discussed companies that possess business models that require users to pay an access fee to use their networks. Upon performing some historical analysis it was clear that these companies have experienced decades of outperformance and it shouldn’t be a surprise due to the fact that these companies have become near necessities in the modern world.

I was inspired to write this second article by all of the positive comments and the great discussions that took place on the original. A few of you may notice that I liked your suggestions and decided to do some further digging. Thank you all for your suggestions, I enjoyed the research and analysis that went into this second installment.

Toll Booth Companies

Here is the second list of companies that I believe operate as toll booths not only now but that will likely continue to do so for the foreseeable future. Contained in the list is a good mix of well-known and maybe some not so well known companies.

1. Intercontinental Exchange (ICE) as a toll booth for financial transactions. ICE is the owner of a massive network of financial highways including the New York Stock Exchange itself. From equity exchanges to foreign exchanges to derivative clearing houses, Intercontinental Exchange has made itself indispensable and the proprietor of one of the largest financial networks in the world. Every public company on the NYSE must pay for the right to be on the public exchange no matter if it’s a bear market or bull market, rain or shine this toll booth is collecting its fees.

2. Broadridge Financial (BR) is the immovable object that stands at the gate for proxy services. I was truly amazed when I discovered that BR provides proxy services for over 80% of all outstanding public shares in the US stock market. For those of you not familiar with proxy services, it is the digital system that allows for absentee voting on major company decisions. The great new for Broadridge is that this is a regulatory requirement. In a world that is increasing its focus on items such as ESG and is becoming more accustomed to remote work, these digital financial services will certainly have the opportunity to grow. They have also taken advantage of their possession of massive amounts of data in recent years to provide additional financial services to companies turning to them for support.

3. Enterprise Products Partners (EPD) is the ultimate toll collector of physical assets. As a midstream company, EPD prospers from collecting access fees to use their oil and gas pipelines. The best part about being a midstream is that they collect a flat rate fee, there is no volatility in pricing due to macroeconomic changes for the upstream partners, making it a reliable cash cow. Regulations also create a high barrier to entry for competitors, meaning they have substantial control on pricing. There may also be a future tailwind for midstream companies like EPD as the US begins to focus on reducing its dependence on energy from foreign countries. The world may be looking towards cleaner forms of energy, but petroleum has deep roots in numerous industries such as plastics and apparel that will keep demand high in the years to come.

4. Fidelity National Financial (FNF) is a toll booth operator for the niche industry of title insurance. In fact, they actually provide insurance for roughly 1 out of every 3 new mortgage titles in the United States. Mortgage titles protect lenders and borrowers from any possible issues or errors when obtaining mortgage titles. FNF has found a way to grow this simple business model all across the US as they continuously make bolt-on acquisitions.

5. Moody’s Corp. (MCO) sits in the booth right in front of the credit rating tollway. Moody’s operates essentially as a duopoly with S&P Global Intelligence (SPGI) with a substantial market share in credit rating services for public companies, a service that no public company can avoid if they want to make a bond offering. Leveraging this knowledge, MCO has expanded its business to include market research services and analysis.

Historical Performance

Just like part one of this series, it is no surprise that these companies have well outperformed the market historically. The 2007-present timeframe was chosen with the rationale that this captures several large market downturns as well as a historic bull run, additionally BR did not trade publicly as its own stand-alone company until 2007. The hallmark of a great company is the ability to deliver in good times and bad and this analysis proves they pass the test.

If you had simply split an initial $10,000 investment evenly across these 5 tickers, you would have seen nearly double the return of the S&P 500. As always, past performance is not an indicator of future returns but it sure does help you sleep a little better at night.

Predicting New Toll Booths

Previously, I provided some ideas of companies that may become toll booth operators in the future. I again will think out loud and provide a couple of thoughts for potential future toll booths.

• Uber Technologies (UBER) for transportation and delivery. A darling of the newly declared “gig economy”, Uber was a first mover and largest market share holder of ride hailing services. You would be hard pressed to find many phones these days that don’t have the app downloaded as it has become a part of everyday life. I believe the combination of Uber and Uber Eats is where the value lies, to capitalize on its advantages they created the Uber One membership. Introducing this membership allows Uber to have a more consistent revenue stream and offers deals to members between ride hailing and delivery that strengthens the network effect. The consolidation and popularity of the food delivery industry will also provide tailwinds in the future for the company, remember back in the day when it was a big deal that a local restaurant offered delivery? Now they all do.

• Zillow Group (Z) for realty services and home searching. This one may be controversial and is surely cyclical but nonetheless worth discussing as it has taken over the home searching market. While many view the iBuying fiasco as a major red flag, I actually find it to be reassuring that the company now understands its identity. What I find most intriguing about Zillow is that the business model resembles that of Google Ads. It’s primary source of revenue relies on advertising and is based on the number of impressions it provides to the customer, similar to Google. It is the undisputed top dog with over 10 billion visitors per year across all of their platforms as of 2021. The new features that have been implemented and are currently in development will drive the company forward, such features include 3D home touring and automated scheduling for home visits.

Summary

I originally did not have any intention on creating a second article but after getting great suggestions on the first one I was inspired to write about more toll booths. Unsurprisingly, all of these companies have outperformed the market historically and have themselves poised in an ideal position to continue that trend. I look forward to hearing the thoughts and opinions from the Seeking Alpha community on future or additional toll booths that could/should be added to the list. If there is one thing we all know for certain it’s that the world is constantly changing, and with that brings constantly new opportunities for companies around the world.