Western Consumer Stocks with Emerging Market Exposures
In a previous post, I discussed how Yum! Brands (YUM) was a viable way for U.S. investors to allocate capital towards the China and emerging markets growth story without stepping out of their comfort zones. In this article, I’m going to take that topic one step further and look at three other stocks that benefit from a similar theme: consumer companies with easily identifiable products that have developed relatively high exposures to Asia and emerging markets.
The investment thesis is relatively simple. In all cases, the companies highlighted are consumer product companies that have developed leading products over the course of decades. To transform themselves from stodgy large caps to attractive growth stories, the companies have made a concerted effort to replicate their proven business models in emerging markets, exporting not only their products, but also their marketing and distribution knowhow.
I selected my three sample companies from scouring a few websites and research reports on companies with high exposures to emerging markets. In particular, Chris Sholto Heaton has a nice list in this article.
Mead Johnson Nutrition
Mead Johnson Nutrition (MJN) sells nutritional products for infants and children, including infant formula and children’s nutritional products. Its Enfa family of brands comprised more than three-quarters of sales in 2009 and is the world’s leading franchise in pediatric nutrition. Founded in 1905, the company became a leading producer of infant formula throughout the early part of the century and was purchased by Bristol Myers Squibb in 1967. In 2009, the company split off from BMS via an IPO and split-off, and is now an independent public company.
MJN operates through two reportable segments: (i) Asia/Latin America and (ii) North America/Europe. Below are statistics for the last three fiscal years for MJN:
As we can see, MJN’s emerging market sales and operating income comprise 58% and 60% of the total company’s operating results, respectively. Asia/Latin America sales grew 24% in 2008 and 7% in 2009, while Asia/Latin America EBIT grew 27% and 25% in each of the last two years. Like the other companies profiled in this post, MJN is taking proven consumer products and replicating their marketing and sales infrastructure in emerging markets. The company’s attractive growth profile was featured in Third Point’s quarterly letter here. Unfortunately for investors, the company’s growth profile has been recognized by the market. The business trades at a steep 29x P/E multiple, and much of the business’s growth, as well as its potential to be a takeover target, has been priced into the stock.
Colgate, the world’s 51st most widely recognized brand as ranked by Interbrand, is a global leader in oral care, personal care (soap, shampoo, deodorant, etc.), home care (Ajax, Murphy’s Oil Soap), and pet nutrition. Here is Colgate’s geographic segment breakdown:
Colgate’s emerging market exposure is relatively strong. Asia, Africa and Latin America accounted for 53% of the company’s 2009 sales (excluding pet nutrition), up from 49% in 2007, and for 56% of the company’s 2009 operating income (excluding pet nutrition), compared to 50% in 2007. Operating income has been benefiting from improving margins in the Greater Asia / Africa region. The Company’s end markets are not growing quite as fast as YUM or MJN, but still at a healthy clip. Recent quarterly results were disappointing partly due to the impact of foreign exchange in their Latin American and Europe/South Pacific operations. At 18x P/E, the company appears relatively attractive as a bet on emerging market growth.
Nike, the world’s 26th most widely recognized brand as ranked by Interbrand, designs, develops and markets high quality footwear, apparel, equipment, and accessory products. Nike has a burgeoning emerging markets presence, but its exposure to fast-growing economies in Asia and Latin America remains materially behind the likes of YUM, MJN and Colgate. Below is its revenue and EBIT breakdown by geographic end market:
As we can see, the United States, Europe and Japan represent 70% of sales, which makes Nike still a company that predominantly caters to developed markets. That’s unfortunate, because growth has been mainly coming from China and emerging markets (excluding central/eastern europe), where sales grew a combined 10% in 2009 and 15% in 2008. Operating profit in China and emerging markets grew a combined 23% in 2009 and 24% in 2008.
Over time, Nike’s emerging markets presence will overtake its Western operations, similar to what we’ve seen with YUM and MJN. The company’s current valuation is at 21x P/E, which doesn’t immediately jump out as either overly cheap or expensive.
Finally, here are the geographic segment metrics for YUM:
Unfortunately, we can’t quite tell what portion of YUM’s sales and EBIT come from emerging markets because YUM lumps Europe, Australia and Canada with the likes of Brazil and Mexico in its “International” division. But a good estimate is that 40% to 50% of sales and profit come from fast-growing emerging economies. YUM has the highest China exposure out of the companies I’ve examined in this post, and out of any large U.S.-based consumer company I’ve been able to find. At a 22x P/E, the stock appears reasonably valued. An investment in YUM may not generate quick returns, but the company is a sound long-term investment if emerging markets, and particularly China, continue to outpace the developed world.