The question about Conrad Industries is always: where does their competitive advantage come from, and is it sustainable? We take it as a given that there is some sort of competitive advantage, because the company has a record of attractive returns on equity.
One way to think about return on equity is the DuPont identity, which breaks ROE into three parts. ROE = (Net Profit/Equity) = (Net profit/Sales)*(Sales/Assets)*(Assets/Equity). The three parts are profit margin, operating efficiency (asset turnover), and financial leverage.
Conrad is almost debt free. The impressive returns aren't coming from leverage. And net income margins are less than ten percent, so it's not that either. That suggests to me that the ROE is coming from operating efficiency/asset turnover.
In a shipyard, that means using its big, discrete tools more effectively: the dry‐dock, berths, and lifting equipment. That means job scheduling and bidding jobs so that the equipment is kept busy.
It turns out that asset turnover is a big deal for shipbuilders. I found a paper about this, Benchmarking Shipbuilders' Turnover of Main Assets [pdf]. It points out that,
The concept of turnover [consolidates] several of the companies’ management capabilities into a single measure. Thus, for instance, a shipyard that does not use adequate planning, scheduling and control systems will possibly have lower turnover; a company that has a strong pipeline of orders will possibly have a higher turnover; a shipyard that has made wrong investments in the past, or wrong demand estimates, acquiring inadequate equipment or capacity, may possibly show a lower turnover; and the shipyard that does not use the plenitude of its assets will show a lower turnover. [...] Since dry‐dock, berths and lifting equipments are some of the dearest assets in a shipyard, the rates of their use is certainly related to their financial performance. [...] Improvements in turnover may be related to more and less efficient processes. Usually when resulting from pressure arising from a substantial backlog, it is not related to improvements in efficiency of those processes driven by cost reduction. Efficiency improvements usually last. If the high turnover of a recent period is mainly driven by demand pressure, the authors would expect a decline even in the outstanding shipyards as soon as demand slows down.This sounds like asset turnover in a shipyard is driven by effective job scheduling and bidding. These would need to be tightly coupled so that you would end up with a mix of jobs that used the labor and equipment most profitably. This probably requires intelligence and a lot of experience. Conrad mentions on their website,
"All of our new vessel construction is done indoors in well-lighted space specifically designed to accommodate construction of marine vessels up to 350 feet in length. As a result, marine vessel construction is not hampered by weather conditions, and we are able to more effectively utilize our workforce and equipment.That makes sense. Indoor facilities increase the asset turnover. So does modular construction, which is a proven technique for making construction happen faster. (You'll notice in that picture that they are in front of the seawall. So during the flooding last summer, they constructed their own levee system to protect the Morgan City shipyard.)
We employ modular construction techniques and zone outfitting, which involve the installation of pipe, electrical wiring and other systems at the modular stage, thereby reducing construction time while at the same time simplifying systems integration and improving quality."
These techniques are probably much easier for a family that's been in the business for 60 years. But, there's another thought that occured to me after reading this excellent post on Oddball Stocks,
"There are plenty of ordinary businesses that earn abnormal returns as well. Why aren't there competitors reducing the abnormal return down to an economic return? [T]he difference between a niche and an economic moat is the ability to scale. [Some companies] operate in a niche and earn excellent returns yet they don't have additional reinvestment opportunities and will most likely remain the same size forever."That too sounds like Conrad. No one is going to go opening Conrad shipyards like See's Candy stores. So it's more of a niche than a moat.