Feasting on a big retail stock in Brazil
When you invest abroad, look for dominant firms in strong industries, says a Canadian analyst who heads down to Rio to buy a retail stock.
If you’re investing overseas, think big.
Look for big companies in strong industries in large countries. That’s the formula one Canadian analyst follows.
And he follows it straight to Brazil. Recently The Economist forecast that this nation could blossom into the fifth largest economy in the world.
There’s nothing to stop Canadian investors from making delectable profits from this growing economy, says Mr. Randy McDuff.
In fact, you can start at the grocery store, he says in Investor's Digest of Canada. But let’s begin at the beginning.
Mr. McDuff is a notably successful investor who took very early retirement from a brokerage firm in Winnipeg and has two of the top 10 portfolios among the 50,000 tracked on Marketocracy.com.
He also likes to search for big investments in places others tend to leave unexplored. This is not the first Brazilian stock he has recommended in this advisory (see Daily Buy-Sell Adviser, June 17, 2008).
A retail boom
In his earlier article on Brazil, Mr. McDuff talked about the potential bonanza of Brazil’s offshore oil discoveries. Now he reports that this could add as much as two per cent to Brazil’s GDP over the next 10 years.
For the next two years, GDP in Brazil is expected to grow by 4.5 to 5.5 per cent. “I suspect this is a conservative figure,” says the analyst.
With a population of close to 200 million, Brazil has a young and motivated work force. It also differs from some emerging economies in its commitment to democracy and property rights. It avoids currency controls and has a strong balance sheet.
Nor is Brazil simply a resource-producing nation, Mr. McDuff insists. While it’s rich in raw materials, less than 5 per cent of GDP comes from commodities. And less than 2 per cent is derived from exports to the United States, so it’s not overly sensitive to economic growth in America.
On the other hand, 60 per cent of Brazil’s GDP comes from industries that cater to the consumer. “Brazilian retailing appears to be in a secular boom,” reports the analyst. By “secular” he means a trend that is well entrenched, and not subject to the whims of cycles or seasons.
Poverty has eroded in the country, the middle class is growing and more than 50 per cent of total retail spending in Brazil is for food. And that is where we will find an appetizing stock.
A high-tech growth rate
Surveying the shelves of Brazilian retail investments, Mr. McDuff’s personal choice is Companhia Brasileira De Distribuicao (NYSE-CBD), which conveniently trades on the New York exchange.
It is the second-largest grocery store chain in Brazil, and its enterprise value in U.S. dollars is $14.2 billion.
Companhia Brasileria (or CBD, to keep it short) has a slightly smaller market share than Carrefour (Paris-CA), whose shares trade on the Paris Bourse. Number three in the country is Wal-Mart (NYSE-WMT), whose market share is slipping.
What’s most impressive about CBD is that “it sports the type of growth rate investors normally attribute to high-tech firms,” says this analyst.
It poured one and a half billion dollars into development from 2007 to 2009, adding 48 new stores and expanding floor space by 12 per cent. For that $1.5 billion investment, it got a $5 billion boost in revenue.
Forward thinking
CBD is “arguably the most forward thinking of all large Brazilian retailers,” says Mr. McDuff. It has a unique bonus program for employees based on lower merchandise losses and higher per-store earnings growth.
And it is entering the most ambitious 36 months in the company’s history, management proclaims. It plans a wave of new store openings, this time amounting to 300, 100 in 2010 alone.
Plus it is taking direct aim at Brazil’s electronic and appliance business. Durable goods may grow as fast or faster than food in the years to come. CBD has moved to take control of Ponto Frio, Brazil’s biggest electronics retailer. It had already begun the process of taking over the biggest general appliance and furniture retailer in the nation, Casas Bahias.
This is clearly a case of number two trying harder, a lot harder.
Dominating sales
In Mr. McDuff’s opinion, CBD’s “highly achievable” business plan justifies ownership of the stock now. In effect, this firm could dominate food, electronic and appliance sales in Brazil in just a few years.
Here’s how the numbers shake out. Revenue for the grocery stores could surpass $22 billion by 2012. The big new durable goods subsidy the company is assembling could generate $13 billion in revenue by that time.
That adds up to $35 billion, or a fair market value of $121 per share, by this analyst’s calculations.
The shares trade today at $70.78 (having risen almost $6 in the short time since this issue of Investor's Digest of Canada went to press). It also yields 0.4 per cent on a dividend of $0.30.
Few North American analysts cover the stock, which is fine with Mr. McDuff, since it “minimizes the potential for investor euphoria and institutional herding.”
In global equity markets, this analyst seeks out companies with strong balance sheets and a near stranglehold on the market in an industry with strong secular growth.
He appears to have found it all on the shelves of a Brazilian grocery store.
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