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Sin and bling stocks for the long run--the company strategies are smart and summer might even deliver a bargain or two
07/13/2012 8:30 am EST
- Remember how once upon a time long-term investors used to ridicule company managers who seemed to have their eyes fixed no further into the future than the end of the quarter?
Now, though, I think the roles are curiously reversed. Oh, there are still CEOs who think they’ve done a great job if they beat Wall Street estimates by three cents a share at the end of the quarter, but I see an increasing number of smart, far-sighted CEOs who see the current market turmoil and economic confusion as a chance to make acquisitions and market-building investments that will pay off over the next decade. And by contrast, because the past decade has been so volatile and so punishing, and the future looks so uncertain, I see many individual investors who are afraid to invest for the long-term because they might take a short-term loss—and perhaps a big short-term loss.
I can’t tell you and won’t to ignore the possibility of short-term loss. This stock market is so volatile that having a strategy to avoid or at least to cope with short-term losses is essential.
But I would like to bring to your attention two related sectors where I think far-sighted companies are making the kind of long-term investments that individual investors should ride along with. In both these sectors I think a long-term perspective will pay off.
Which two sectors? What I call sin and bling. The first is composed of “sin” companies in alcohol and gambling. The second of “bling” companies in the luxury goods segment and especially those with a big stake in the jewelry business.
The logic in these two sectors is very simple and very similar.
- Maturing markets in developed economies are, well, mature and sales growth is very slow and likely to stay disappointingly slow even after the Great Recession is over. (Whenever that might be.) For example, in Japan Kirin Holdings and Asahi Group Holdings are forecasting 2012 beer sales growth of 2% and 0.5%, respectively. In the United States beer sales volume fell by 1.7% in 2011. Gambling revenue in Nevada grew by 2.8% in 2011. Jewelry sales in the United States grew at a 5.3% annual rate in the first quarter but fell by 3.7% year-over-year in May.
- The growth is all in developing economies. China, now the world’s biggest beer market, accounted for 43% of the world’s volume growth in beer over the last five years. Wine imports to China are growing at a 50% annual rate. Jewelry sales are forecast to grow at a rate in the high teens in 2012 after growing by 40% in 2011. In the first six months of 2012 gambling revenue in Macau grew by 20% from the same period in 2011.
- The biggest growth comes in aspirational sin and bling. Yes, increased consumption of everything from beer to fine watches is a reflection of the growth of the middle class in developing economies. Brazil’s lower middle class—families making between $850 and $3667 s month—grew by 60% from 2003 to 2011 and is forecast to grow by another 12% by 2014. Brazil’s middle and upper middle class—families making more than $3667 is forecast to double from 2003 to 29 million by 2014. But the fastest growth is in sin and bling products where the story isn’t just being able to afford more but being able to afford better. And here the highest sales growth goes to sin and bling that signal a consumer has arrived at a higher status. Sales of premium spirits, for example (such as single malt scotch), are forecast to grow at an average annual rate of 13% for the next 15 years, according to Goldman Sachs. And that’s even though emerging markets already account for 40% of premium spirit sales by volume.
- The big profits are in branded sin and bling in situations where it’s hard or expensive to create new brands. Better to buy or expand existing well-known brands. Scotch is a great example. By definition Scotch can only be made in Scotland and must sit in oak casks for at least three years to mature. Global sales of Scotch are up 50% in the last five years and as you’d expect with demand growing and supply limited, Scotch prices have moved up nicely. By volume Scotch makes up just 4% of the 27 billion liters of spirits sold annually, but by dollar value of sales Scotch makes up 12% of the global spirits market.
Some sin and bling stocks for the long run?
Hard to argue with Diageo (DEO in New York and DGE.LN in London). At a July 11 close of $102.90, the stock trades near its 52-week high but the forward price-to-earnings ratio of 17.3 on fiscal 2012 earnings isn’t too outrageous. (It puts the stock’s PE to Growth Rate (PEG) ratio at 1.48. McDonald’s (MCD), to take one comparison shows a PWEG ratio of 1.65.) The company owns the Johnny Walker brands and has recently announced that it would invest $1.5 billion to expand Scotch production over the next five years.
Anheuser-Busch InBev’s (BUD) purchase of Mexico’s Grupo Modelo for $20 billion following so closely on SABMiller’s (SBMRY) purchase of Australia’s Fosters for $12 billion illustrates the race among the world’s big brewers to snap up brands that can add a head of growth to slow fizzing sales in mature markets. What beer companies might be in play? SABMiller has acquired a 24% stake in Turkey’s Anadolu Efes (AEFES.TI in Istanbul.) The Turkish brewer exports about 75% of its production with Russia (20% market share) making up its single biggest export market. SABMiller needs to find a way to challenge AB InBev’s dominance in Brazil, the world’s third largest beer market. The best play there would be an acquisition of privately owned Cervejarias Petropolis, which holds about 7% of the Brazilian market. In Africa Kenya’s Tusker, brewed by East African Breweries (EABL.KN in Nairobi) would be a way to gain share in one of the continent’s fastest growing economies. Diageo is the company’s largest shareholder.
In the bling sector, the fastest growing market is branded jewelry, which at the moment represents just 19% of the total fine jewelry market. LVMH Louis Vuitton Moet Hennessey (MC.FP in Paris or LVMUY in New York) acquired Bulgari for $6 billion in 2011, doubling its watch and jewelry sales, and giving a boost to the company’s drive to enter the branded watch and jewelry market. The company’s Louis Vuitton Watches and Jewelry division has plans for stand-alone stores in New York, London, and Hong Kong. The most interesting play in this part of the bling sector, though, in my opinion is Cie Financiere Richemont (CRFUY in New York or CFR.VX in Switzerland) The owner of the Cartier and Piaget brands already gets 42% of sales from the Asia-Pacific region and has plans to grow its retail business in China to 250 from 160 stores.
A word of caution on buying shares of luxury-brand companies right now. Hong Kong has just announced that luxury sales grew by only 8% in May. That’s the lowest growth rate since September 2009. It looks like the slowdown in China’s economy is taking a bite out of the market for luxury goods too. I’d watch and see if I could get a piece of the smart long-term strategy of these companies for a lower price come September or so.
That would also be my approach to the Macau gambling market right now. I like the stocks of the companies with big positions in the explosive growth of gambling in Asia—and especially Las Vegas Sands (LVS) or its Macau unit Sands China (1928.HK), and MGM Resorts International (MGM), but a slowdown in growth in Macau is putting pressure on these stocks and MGM Resorts shares just got hit by lower than expected revenue on the Las Vegas strip. I expect the downward pressure from Macau to increase after Sands China asked on July 11 for an extension on its permit to build a new casino resort on Macau’s Cotai strip. Let that play out for a while and you might find a bargain or two by fall.
After all, even if you like a company’s long-term strategy, there’s no reason not to look to buy in after a short-term drop.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Anadolu Efes, LVMH Louis Vuitton Moet Hennessy, MGM Resorts International and Sands China as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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