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Liang Chen
Steven Chen
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3 Consumer Products 'Traveling' Strongly for Shareholders

The highly travelable product should provide the company with a considerable growth runway where incremental capital can be deployed to compound shareholder value

As mentioned in our past article, "travel-ability" varies a lot across consumer products. See's Candies and Coca Cola (NYSE:KO) delivered totally different compounding potentials for Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B). The latter widely spread its brand image worldwide, while the West Coast candy company found itself even struggling to travel across the country.

The rationale behind is a complex one, depending on a variety of factors. Meanwhile, a low "travel-ability" by no means prevents the business from generating superior cash return or profitability for owners (See's is a good example). However, the highly travelable product should provide the company with a considerably more massive growth runway where incremental capital is deployed to compound shareholder value instead of being returned to investors, who then have to find opportunities with attractive returns elsewhere.

Below, we hand-pick three consumer goods companies that see a vital sign of their products traveling well outside of the "conquered" home market. The critical factor that we look for is sales growth internationally compared to domestically (or overall). As you may notice, all three picks are beverage companies. Maybe this is the space where investors can search harder for the next world-class brand like Coca Cola.

Fevertree Drinks (LSE:FEVR)

UK-based Fevertree is the leading producer of premium drink mixers. Since the launch of its first product, Indian Tonic Water, in 2005, the business has rapidly filled the UK premium mixer category, with an estimated 40% retail share at the end of 2019. Total domestic sales increased year-over-year by a triple-digit rate back in 2016, but the growth soon moderated (to 96% in 2017, 53% in 2018 and -1% in 2019), primarily due to market saturation.

However, the whole Fevertree Drinks still manages to expand, mainly overseas. The company's products are now being distributed to more than 75 countries, with a rapidly-increasing international appeal. To be specific, both the U.S. and continental Europe have been consistently delivering a healthy double-digit growth rate over the last couple of years, not to mention the company's "Rest of World" segment (including the high-potential Asia market), which is increasing sales by more than 30% annually but only represents less than 7% of the total revenue.

Monster Beverage (NASDAQ:MNST)

California-based Monster Beverage looks to us like a similar case, growing profitably thanks to its internationally travelable flagship energy drink products. One or more of Monster's products is now distributed in approximately 153 markets worldwide. Although the home market still accounted for over two-thirds of the total revenue, its significance has steadily declined over recent years. It may continue to do so, in light of the high market share (40%+) achieved and remaining stable domestically. The U.S. sales increased year-over-year by 5.3% and 7.5%, respectively, over the past two years – roughly in line with the performance of the category. In comparison, international revenue grew by 19.1% and 24.8% during the same period. Phenomenal market-share gains were observed in countries all across the globe, such as Brazil, the UK, Japan, Spain, Canada, Germany, France and Mexico.

Nichols (LSE:NICL)

Our third case of the day, UK-based soft drinks maker Nichols, is the smaller player in the field. The family-backed company is behind the century-old Vimto brand, which still contributes to the majority of sales as of today. For decades, Vimto overwhelmingly served British consumers, until it expanded significantly overseas, especially in Africa and the Middle East, since the 2000s. The iconic drink is currently sold in more than 85 countries, with many new markets opened up for Vimto in recent years (e.g., Uganda, Sudan, Tanzania). Associated with the holy month of Ramadan, a glass of the sugar-boost purple drink has even become the tradition for many Muslims to end a day of fasting. While the home market remains the most significant in terms of revenue (nearly 80% of total) for Nichols, international expansion appears to be the significant long-term growth driver. For the last decade, international sales grew by 138% compared to 93% domestically.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Berkshire Hathaway, Fevertree Drinks, Monster Beverage, and Nichols.

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About the author:

Steven Chen
Steven CHEN is a quality-focused, business-perspective investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital).

Steven can be reached at [email protected], LinkedIn, or WeChat (ID: LSCHEN2005).

Also, check out his column at Smartkarma on the Asian market - www.smartkarma.com/profiles/steven-chen

Visit Steven Chen's Website


Rating: 4.0/5 (4 votes)

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Comments

Praveen Chawla
Praveen Chawla premium member - 2 months ago

Good article, Steven. Any of the above stocks you think are attractive at current levels?

Steven CHEN
Steven CHEN - 2 months ago    Report SPAM

It depends on the hurdle rate you would require. None of the valuations can be seen as being "cheap" at least.

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