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Where H.J. Heinz is Telling You to Invest Now
Somewhere in your pantry or refrigerator hides a lesson in global investing.
You certainly won’t immediately see it as that. To you – to most people – it’s just an ordinary bottle of ketchup.
But behind the label is the story of why you should have some of your wealth overseas … even in moments like now, when Main Street investors are paralyzed by the illogical fear that any money outside America – or, really, any money at risk at all – is just foolish.
All you have to do is pull apart the earnings report that condiment king H.J. Heinz released last week to realize that if you’re not invested in the emerging markets, you’re making a monumental mistake as an investor. You’re locking in subpar long-term returns when you could instead guarantee yourself larger profits.
Heinz’s Real Growth is Happening Outside the West
Heinz reported fairly decent financial results for the first quarter of the company’s 2013 fiscal year. That seems unremarkable if only because ketchup, steak sauce and the like are consumer expenses that aren’t terribly affected by the economy. Even through the worst of the Great Recession, Heinz’s sales continued to grow.
After all, Western eaters are still dipping their fries in ketchup, and restaurants are still buying condiments for customers who continue to use their disposable income to eat away from home. But Western consumers are clearly not increasing their condiment consumption very rapidly because Heinz’s U.S. and European sales have been largely flat for the past four years.
For Heinz – for investors – the real story is in places like Brazil and emerging markets across Asia. That’s where the company’s growth is soaring.
Indeed, if not for emerging markets and the Asia/Pacific region, Heinz’s first-quarter sales would have barely budged. Organic sales growth – meaning growth that came from selling ketchup and sauces, rather than growth through acquisitions and currency movements – moved negligibly in North America and Europe. But in Asia/Pacific, organic sales grew more than 4%, while in the emerging markets – what Heinz calls the “rest of world” – they surged nearly 32%.
But that’s just one quarter of results, and it’s easy to dismiss because the sales base for Asia and the emerging markets is smaller than it is in the U.S. and Europe. What you can’t dismiss, though, is the trend … and Heinz’s trend line says everything about the opportunities that exist in the emerging markets.
As recently as 2007, Asia and the emerging markets accounted for just 18% of Heinz’s global sales. Today, just five years later, they’re now more than one-third of Heinz’s sales. Combined, they’re a larger part of the business than either the U.S. or Europe.
That tells you just how important the non-Western world is to consumer-product companies. Heinz isn’t growing its emerging sales off a tiny base any more. The sales are growing off a meaningfully large base … and they’re dramatically outpacing the sales in saturated, Western markets.
The Most-Profitable Combination For Investors
Here in the States, we think of Heinz as one of the quintessential American brands – a name we’ve grown up with as a country for more than 140 years. But the company’s numbers make clear the fact that what’s driving this quintessential American brand are no longer quintessential American consumers but, instead, new consumers for whom the cost of a bottle of ketchup was an extravagance just a few short years ago.
Today, those consumers are able to more easily afford items like ketchup because incomes are rapidly rising in non-Western countries, and the middle-class population is expanding quickly. That’s a fabulous combination for consumer-product companies.
It’s also a fabulous combination for us as investors. It’s the very reason you should be following companies that are expanding in places like Asia, the Middle East, Africa and South America.
Aside from the rare, revolutionary technologies like the iPhone, you don’t find blisteringly fast growth in most consumer products in the West anymore. We’ve had access to packaged foods, consumer electronics and such for so many decades now that the best a company like Heinz can do in the U.S. is to grow its product lines marginally – and often by creating items like reduced-sugar ketchup that cannibalizes sales that regular ketchup would have grabbed.
But in the emerging markets where the companies I’m following in my Global Growth Strategist advisory service are expanding their businesses, products we take for granted are now selling in big quantities … and they have huge growth ahead of them for years to come.
Think about this: The U.S. and Europe combined have less than 700 million consumers. The emerging markets will soon exceed one billion – and will one day outnumber the West by four or five to one. And remember that these are consumers who are only about a decade into their spending spree. That’s precisely why Heinz and other consumer companies are able to maintain growth even as their historic business in the West slows or even contracts … tens of millions of new consumers are emerging every year with a taste for ketchup – and all the other niceties of a middle-class life.
Consumer-product investors still have decades of growth ahead of them. But you have to be invested in the emerging markets to really benefit.
Fatter Profits Overseas and a Buffer against a Weaker Dollar
I’m not saying you should shove all of your money into emerging markets. But you should absolutely have some exposure … and for two very crucial reasons.
First, the faster growth that’s happening all across the emerging world will boost the profit potential in your portfolio, helping you meet longer-term goals such as increased spending power in retirement.
While many companies still report steady growth in established markets, the best they can muster is often no better than single-digit growth.
But for those tapping into emerging markets, there is still the possibility of rapid growth. By investing in such companies, you put yourself in a better position to benefit from changing global demographics while still enjoying the ease of investing in U.S.-based companies.
Second, the focus on earning foreign profits buffers these companies – and you – against the structurally weak U.S. dollar. I know I sound like an echo chamber when I say it, but the U.S. fiscal situation is not conducive to a strong currency. That’s why the greenback has tumbled over the past 30 years, why it has lost 30% of its value in the last decade alone, and why it has much more room to crumble in the coming decades. Revenue and profits earned in foreign currencies equate to a larger and larger sum of dollars when they’re reported here in the States … which, in turn, helps boost the value of the shares, since a stock price is nothing more than the stream of dividends and earnings.
Ultimately, you can look at Heinz as nothing more than a bottle of ketchup. Or you can see the message hidden inside the bottle.
Until next time, stay Sovereign…
Jeff D. Opdyke
P.S. As I said, for my Global Growth Strategist subscribers, I am seeking out growing U.S. companies that are finding most of their business overseas. I call these companies “baby multinationals,” and right now I’m looking at one that’s poised to go on a historic growth spree. To learn more about my research – and how you can make a play on this company today – click here for my special video report.
2012-09-05 11:40:48
Source: http://sovereign-investor.com/2012/09/05/profit-from-the-new-consumer-in-emerging-markets/
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