Garbage in the Moat

In my last post I wrote about the CIA's valuable brand and Warren's statement to me one time that if he could buy only one business it would be the Catholic Church (this was before the pedophile scandal). An interesting question to ask is, how do you model the value of the Catholic Church? (with no disrespect to Catholics!)

If the Catholic Church traded as a stock (too bad the ticker POPE is already taken) a diligent and determined analyst could figure out a way to value it, looking at number of adherents, population growth trends, conversion rates, lapsation rates (this is starting to sound rather like auto insurance, hmmm), tithing percentages, and margins. How much is the real estate worth? (And, lately, what are the litigation liabilities?)

Having done that, you could discount the cash flows at a conservative rate, or figure out a reasonable price relative to the earnings, then add a margin of safety. In a sense it would be hard to go wrong using any reasonable and conservative valuation method if you got the assumptions in the paragraph above correct.

The key question is this: who could throw garbage in the "moat", the business's competitive advantage that protects its franchise?

In the case of the Church, the answer is that it is the priests and Pope who could throw garbage in the moat. And that's what happened.

The first two steps in valuing a "brand" business are to figure out a) what is the real moat and b) who could throw garbage in it. This analysis might have told you to put a wide margin of safety on the Catholic Church, because you are relying on a management structure and human resource department that have some obvious business risks.