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Steven Chen
Steven Chen
Articles (206)  | Author's Website |

Finding the Next Big Thing

Do you agree with these candidates as being the next Coca-Cola, McDonald's and Marlboro?

Investors often spend a considerable amount of time looking for the "next big thing." Indeed, a couple of stocks of such businesses (if bought at a reasonable or even a bit premium price) could be far more sufficient to make them lifetime wealth. Consider what Coca-Cola (NYSE:KO) and American Express (NYSE:AXP) have accomplished for the Oracle of Omaha.

In retrospect, it is not difficult to learn that most (if not all) of these ultra-rare companies, in their early days, possessed a formidable economic moat, robust business economics and a massive growth runway to deploy capital for decades.

When it comes to identifying the next big thing, we at Urbem favor relatively stable industries that drive a megatrend. This scope would probably rule out most technology players and resonate well with several consumer services and goods providers, in our opinion.

Premiumization – Fevertree Drinks vs. Coca-Cola

UK-based Fevertree Drinks (LSE:FEVR) started just in 2005 with the mission to "combine the highest quality naturally sourced ingredients with expert manufacturing techniques to produce an unrivaled drinks experience." Its product portfolio mainly consists of tonics, ginger ale, ginger beer, bitter lemon, lemonades, spring soda water and premium cola. Apparently, Fevertree is betting on the premiumization megatrend, where consumers would not necessarily drink more but instead drink better.

Fevertree Drinks has a market cap of a little over 2.5 billion British pounts ($3.3 billion), compared to nearly $220 billion for soft drink giant Coca-Cola. The company employs an asset-light, highly-scalable business model built upon a brand-driven moat as well as outsourced bottling and distribution, which enabled a 37% annual average top-line growth alongside a superior return on capital over the past three years.

Digitalization – Domino's Pizza/Wingstop vs. McDonald's

For so long, McDonald's (NYSE:MCD) had been the synonym of fast food. The golden arches also reinvented the restaurant business by introducing the franchise model driven by real estate income.

However, both Domino's Pizza (NYSE:DPZ) and Wingstop (NASDAQ:WING) appear to have brought the model to the next level, emphasizing delivery and take-out instead of dining in with a focus on the digital real estate – i.e., netizens' screens. The resulting benefits include low capital requirements and better economics per square foot for both franchisees and the companies.

Domino's Pizza and Wingstop have market caps of $15.4 billion and $3.9 billion, respectively, compared to $167.3 billion at McDonald's. Both businesses have been expanding at a double-digit annual average rate for the past couple of years, primarily driven by the increase in both same-store sales and store counts while earning a double-digit return on reinvested capital. The prospects for either of them looks quite favorable compared to McDonald's, which nowadays struggles to return to sustainable growth for its more "traditionally" fast-food setup.

A Smoke-free World – IQOS vs. Marlboro

"Our aspirational target set three years ago is that by 2025, at least 40 million adult consumers will have stopped smoking and switched to our smoke-free products. I am convinced that it is possible to completely end cigarette sales in many countries within 10 to 15 years, but for that to happen, manufacturers and governments need to work in the same direction."

- Andre Calantzopoulos, CEO, Philip Morris International, Integrated Report 2019

Philip Morris International (NYSE:PM) can be one of the most under-appreciated (or at least controversial) ESG names on this planet, in our opinion. With its century-old, best-selling cigarettes brand aside, the company has been investing heavily in the next generation of tobacco, providing scientifically proven better alternatives to hopefully reduce the harm caused by its traditional combustible products.

So far, the strategy has worked out well. In 2014, Philip Morris introduced IQOS, a heat-not-burn, and, therefore, so-called "reduced-risk" product, which stands for "I Quit Ordinary Smoking" and produces no second-hand smoke or ash. Fast forward to today, and IQOS already covers 57 markets worldwide with a total user base of 15.4 million, including more than 11 million who have stopped smoking and switched over. By contrast, global cigarette shipment volume appears to have experienced a secular decline.

Notably, the CEO's ambitious target of converting over 40 million smokers in aggregate by 2025 implies a vast growth runway ahead for IQOS. As of fiscal 2019, the reduced-risk portfolio (mainly the IQOS products) accounted for 18.8% of the total sales at Philip Morris and increased its revenue by more than 36% year-over-year, compared to an over 5% decline for the company's combustible products. Philip Morris, as a whole, earned 15%-20% returns on assets over the last five years.

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 Philip Morris, Fevertree Drinks, and Domino's Pizza.

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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: 4.2/5 (5 votes)

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lorenzo nencioni
Lorenzo nencioni premium member - 1 day ago

interesting !

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