At first glance, the logic of capturing emerging markets growth via blue-chip multinational investments seems compelling.
Blue-chip multinationals like Johnson & Johnson (JNJ) or Procter & Gamble (PG) get a substantial and growing revenue stream from emerging markets.
Plus, these giants offer rock-solid balance sheets, premium products, top-flight management, diversified markets and dependable dividends. But when you check the performance of their stocks, things just don’t add up.
Take Johnson & Johnson’s stock performance, as an example. Over the past five years, JNJ has been uninspiring – lagging even the S&P 500 by a substantial margin.
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Part of the answer is that it’s harder to grow a giant, mature company. Coca-Cola (KO) is already in every country but two: Cuba and North Korea. Heinz already makes and sells 650 million bottles of ketchup every year. How much bigger can they get?
But that still begs the question of why they benefitting more from international and emerging market consumer growth. A study by Smithers & Company offers some clues.
The study found that, on average, S&P 500 companies received close to 45% of their revenue from international markets, but this revenue accounted for only 10% of net profits. The only explanation is that overseas business is less profitable due to higher costs and/or lower margins due to keen competition. Coke is spending $3 billion in India even as Bernstein Research finds its profit margins are declining due to local competition and high distribution costs.
Procter & Gamble highlights these issues as well. Its track record of penetrating emerging markets is impressive. These markets now account for 35% of total revenue and volume is doubling every four years.
But this premier blue-chip stock’s recent disappointing quarter including lowering its outlook to only 2%-3% profit growth fits the pattern. One of the explanations by management was that the company had moved too aggressively into new markets, which led to higher expenses and lower margins. This lackluster performance reflects the downside of investing in these behemoths. P&G has annual sales of $80 billion, which is larger than the GDP of countries like Cuba, Luxembourg and Ecuador.
As you can imagine, this can easily lead to an overly complex and slow-moving bureaucracy. For example, P&G has a matrix of 1,000 product/country combinations though only 40 of these combinations account for 50% of sales. The bottom line is steady but slow growth.
Capture Home-court Advantage
Most importantly, the competition from local consumer firms in every one of these country markets is fierce. These home country competitors offer investors the following edge over foreign multinational investments:
-Home-court advantage regarding knowledge of markets
-Much faster growth prospects and at the early stage of the growth cycle
-Full support of the government on any regulatory issues
-Lower costs and prices help it undercut rivals and expand market share
Furthermore, these “local multinationals” are moving beyond home markets into regional and world markets. In short, they are “multinationals on steroids” offering you a chance to grow with them as they capture rising middle class consumers.
According to a Boston Consulting Group of multinational companies, more than three-quarters said they expect their companies to gain share in emerging markets—but only 13% think their companies have the capabilities to successfully take on local competitors.
Two Emerging Market Multinational Investments
The challenge is that many of these companies do not trade on U.S. exchanges. An easy way to gain exposure to this group is with the Emerging Global Shares Consumer Titans (ECON) ETF, a basket of the 30 leading emerging market consumer multinationals. These companies are not small by any means with an average market value over $30 billion.
One of the companies in this basket that does battle with American multinationals like Kraft and Tyson Foods is Brasil Foods (BRFS). Brasil Foods is the largest exporter of poultry in the world and supplies food products to McDonald’s, Pizza Hut and Burger King. The company is also Brazil’s largest maker of frozen microwave dinners and meats.
In Brasil Foods’ case, the parent company traces its roots back to the 1950s, but it was a merger with two other Brazilian firms, Perdigao SA in 2008 and Sadia in 2009, that put Brasil Foods on the map. While the company supplies markets in Asia, Europe, the Middle East and North America – two-thirds of its revenue comes from home market Brazil. In the last year, Brasil Foods’ share price has gone from just under $12 a share to less than 5. But, so far in 2019 it’s in a nice uptrend.
If you’re frustrated by the lack of capital gains in traditional blue-chip multinational investments, take a look at this emerging multinational sitting at the sweet spot of a rising emerging market consumer-led middle class.