The Duopoly Portfolio

– S&P Global and Moody's $SPGI $MCO

– Visa and Mastercard $V $MA

– Eli Lilly and Novo Nordisk $LLY $NVO

– Pepsi and Coca-Cola $PEP $KO

– Thermo Fisher and Danaher $TMO $DHR

– Cadence and Synopsys $CDNS $SNPS

– L’Oréal and Estée Lauder $OR $EL

Why are duopolies so interesting?

First, in most cases they have a wide moat. This means they can fend off competition, have high profit margins, strong cash flows, and can reinvest their capital at high returns.

Second: market share gains. Companies cannot always beat every competitor, which leads them to target weaker rivals and avoid stronger ones. They continuously take market share from the weaker competitors. The duopoly (or oligopoly) only strengthens further.

All of this leads them to the third, very significant long-term factor: the compound interest effect. Because they are of such high quality, incidentally gaining market share and able to reinvest their capital at high returns, investors struggle to account for the long-term effects of compounding. They are essentially cheaply valued, even if it doesn’t look that way in the present, because the compound interest effect has such a powerful influence over the long run.

Example of two companies with a 20-year ROIC return:

A with 18% return on capital turns $ 100 → $ 2’739

B with 6% return on capital turns $ 100 → $ 321

Quite a difference, isn’t it?