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Considering Ever-Lasting Businesses
Posted by: fedezaldua (IP Logged)
Date: September 14, 2013 08:09PM
There are some companies poised to live longer than you can imagine. Their business motto, as Buffet calls competitive advantages, are so strong that they can sustain good margins and high shares of their respective markets almost indefinitely. Even when they rarely trade cheaply, this companies are ideal for all portfolios looking for sustainable cash dividends and slow but constant capital appreciation. Here I will make a short analysis of two companies that can be counted as between those that will keep producing growing earnings indefinitely.
The Strongest Franchise in the World
Buffett's favorite company, The Coca-Cola Company (KO), can be thought as the strongest global consumers goods company in the world. Through decades Coca-Cola has built the strongest distribution network in the world. Despite its weak 1% global volume growth shown at second quarter results, Coca-Cola continues to be disciplined and investing rationally behind its brands. The company has been able to keep gaining market share in many regions and has clear strategies to return to growth in key markets like the US and China. Besides, Coca-Cola continues to successfully increase pricing almost every region. North America and Europe have positive pricing trends (up by 1% and 2% respectively) while the company has been increasing prices in Eurasia, Africa and Latin America by 8%.
Coca-Cola, which I expect to grow its top line by 4.5% and its earnings per share by 10% between 2013 and 2014, trades at a 4% discount to global consumer goods peers. Historically, the company has traded at a 10%-15% premium. Selling for 2014 16.5 times earnings and paying a 2.9% cash dividend yield, it could be a good time to buy Coca-Cola.
Latin America's King of Beer
AmBev (ABV), which is 62% controlled by AB InBev (BUD), holds de-facto beer monopolies across most Latin American countries and its the most cost-efficient consumer goods company in the world. Its an absolute dream for shareholders. The company controls the beer market in countries such as Brazil where it holds a 70% market share, Argentina with a +75% market share and holds almost 100% of the market in countries such as Bolivia, Uruguay and Paraguay. Of course controlling a market has many advantages such as being able to generate EBIT margins that are close to 45%.
After a (very) disappointing first quarter, volumes are growing once again with pricing trends that keep on being strong. In fact, pricing trends are so strong that, even when analysts expect the company to lose volume in 2013 (2%-3% decrease), they also expect top line to grow by as much as 6% year-over-year. AmBev, which is also the biggest PepsiCo bottler in the world and is held by Maverick's Lee Ainslie, trades at 2014 19.5 times earnings and pays a 2.65% cash dividend yield.
Both AmBev and Coca-Cola hold businesses protected by strong competitive advantages. Since they are already mature companies you might not get huge short term upside but you will own a stock that will pay always increasing cash dividends and will gain value as this companies adjust prices above inflation while growing volumes above population growth.
Stocks Discussed: ABV, KO, BUD,