When you buy a share, you are buying an ownership stake in the company and a pro-rata right to the future profits generated by the business.

While a chunk of these profits may be distributed to investors in the form of a dividend, it is also likely that some will be retained and reinvested into the business to generate future profits. The reinvestment piece is important as it can lead to the compounding of a company’s earning power and value over time.

"A lesson that is often overlooked by individual investors who own common stocks, particularly those who don't stick around to benefit from the compounding effect, is the power of retained earnings." Warren Buffett

This explains why we think that moats – something that protects the returns achieved on these investments from competition – are so important. All else being equal, we think a company with a moat is more likely to grow in value over time than one that doesn't.

There is, of course, a caveat: shares in businesses of this quality usually trade at a premium price. The the only real chance investors will have to buy shares at bargain prices is when some kind of problem arises and other investors sell down the shares.

If the problem turns out to be temporary and the business recovers, “buying the dip" can provide beneficial to long-term investors. If it is permanent, though, the purchase may end up proving far too expensive.

The challenge, then, is figuring out whether the problem is temporary or permanent. Today we’re going to look at two ASX companies that have been awarded moats by our analysts but have fallen heavily in recent months.

Before we start, though, I would like to remind you that individual shares should only be considered in the context of a broader investing strategy. You can find a step-by-step guide to forming your strategy here. There is also an explanation of terms like Moat, Star Rating and Fair Value at the foot of this article.

CSL (CSL)

CSL’s main business is the sale of treatments derived from plasma, a key component of human blood. It is especially dependent on sales of immunoglobulins, also known as antibodies, that help people fight off infection.

The global plasma therapy market is highly consolidated, with CSL being one of three Tier 1 players. All three of these firms – CSL, Grifols and Takeda – are fully integrated and collect their own plasma to avoid supply bottlenecks.

CSL owns roughly 30% of the world’s collection centres and is well positioned to profit in an industry where margins are driven by scale. As a lot of the costs are fixed, the more plasma you collect and process, the cheaper it becomes on a per-litre basis.

These cost advantages underpin our CSL analyst Shane Ponraj’s Narrow Moat rating for the company. He also notes the strong intangible assets that CSL has amassed across the business, from proprietary therapies and better yielding collection processes in CSL Behring to Seqiris having the only FDA approved cell-based flu vaccine.

CSL has ballooned into a $20 billion-plus revenue behemoth, with growth in its core immunoglobulin business joined by several acquisitions in other areas. These include the major purchases of iron deficiency and rare diseases pharmaceuticals business, Vifor, and the flu vaccine business, Seqiris.

You could say that CSL has faced one headwind after another in recent years, leading to roughly flat share price performance over the past five years and a 20% reversal since July 2024.

Covid-19 severely restricted the ability for CSL to collect blood and forced CSL to turn to the more expensive after-market for plasma, pushing down margins in its core segment. Meanwhile, Vifor has largely disappointed since its acquisition and Seqiris reported weaker growth in recent years after Covid pulled a lot of vaccination uptake forward. Our CSL analyst Shane Ponraj, however, remains positive on the company's outlook.

Shane thinks that strong demand tailwinds for CSL’s vital immunoglobulins business can underpin solid revenue growth at the group level. Meanwhile, he expects margins to surpass pre-Covid levels due to higher processing volumes and an improvement in plasma yields thanks to CSL’s research & development efforts.

CSL shares recently traded roughly 25% below Shane Ponraj’s estimate of Fair Value and carried a four-star Morningstar Rating.

IDP Education (IEL)

IDP is a global education services business that offers student placement services as well as English language testing through its part-ownership of the IELTS brand.

IDP shares have sold off by more than 50% over the past year as tighter migration policy, including caps on foreign student numbers in Australia and Canada, have led to concerns over the outlook for its student placement business.

The weaker legislative environment was noticeable in IDP’s recent half-year results, with the company guiding to placement volumes 20-30% lower than the previous year. However, our IDP analyst Shane Ponraj expects that this weakness is cyclical rather permanent.

As he explained in a recent Ask the analyst article, Ponraj thinks that governments will return to a more supportive stance as cyclical factors like higher inflation (a key driver of tighter migration policy) abate and election cycles in key countries come to an end.

If anything, more secular trends in IDP’s key destination countries – like aging populations, shrinking tax bases and a dependence on immigration for economic growth – would seem to encourage a pivot back towards higher foreign student numbers.

As for IDP’s major source countries, which include India and China, demand for student placement services remains strong as education levels and the size of the middle-class populations in these countries continue to rise.

Taken together, Shane thinks that the main concern holding back IDP in recent months is a transitory one. He expects the student placement segment, which was responsible for almost two-thirds of gross profits last year, can get back to high single-digit revenue growth from 2026.

Shane also pointed to the possibility that capping the supply of foreign student places could bring about tuition fee inflation. This positive for IDP, which earns commission equaling a percentage of these fees, was visible in IDP’s half year result as average revenue per student rose an impressive 14%.

Turning to IDP Education’s moat, Shane thinks the student placement part of the business has traces of a network effect due to the number of students and institutions it connects. But he does not think it has a uniquely advantaged competitive position against other players, who are essentially commodity providers to the universities.

Instead, IDP’s Narrow Moat rating at the group level comes from network effects attached to its partially owned IELTS English language testing standard. IELTS maintains very high levels of recognition with academic institutions, migration authorities and employers. This, in turn, stimulates high demand from applicants for IELTS accreditation, while this large pool of candidates also incentivises new and existing bodies to accept the IELTS, and so on.

At a recent price of $10 per share, IDP Education traded materially below Shane Ponraj’s Fair Value estimate of $22. The shares commanded a five-star Morningstar Rating at this price.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.