Find Consumer Growth Overseas
Surprisingly resilient U.S. shoppers and improving consumer confidence have fueled strong gains in consumer-related stocks over the past year. But looking ahead, the most compelling consumer stories lie overseas.
Changes in the world economy are greatly impacting the distribution of income, with consumers in Asia and Latin America enjoying a ramp-up in spending power. International investing, with an eye toward consumer plays, makes sense for at least three reasons:
An expanding global middle class should drive consumerism. While the U.S. market for many consumer goods is mature, an expanding middle class, particularly in such fast-growing economies as China, India, and Brazil, bodes well for consumer-dependent companies. Consider personal computers, a slow-growth market in the U.S. with an estimated market penetration of about 81%. In China, that penetration figure is estimated at less than 6%.
Opportunities remain among large and growing populations. In Asia, China and India are the focus of many multinationals. But other companies view Indonesia as a relatively untapped and potentially explosive consumer market. With 240 million people, the world’s fourth-largest population behind China, India, and the U.S., Indonesia is in the midst of an economic resurgence aided by political reform and government spending.
Brazil is gaining ground. Already the largest economy in Latin America and the 10th-largest in the world, Brazil boasts a $1.6 trillion economy expected to grow by a robust 5.8% in 2010. Goldman Sachs estimates that Brazil could have the world’s fourth-largest economy by 2050.
All 12 companies listed in the table above generate at least 25% of their revenue in foreign markets. One favorite with a consumer slant is profiled below.
Tech titan Microsoft’s ($31; MSFT) consumer business is built around its Xbox 360 game console and Zune entertainment device. The company also sells numerous consumer software and hardware products, including mice and keyboards. Microsoft is rolling out a family of phones geared to young consumers in an effort to jump-start its mobile-phone business.
Microsoft’s Windows operating systems, which are pre-installed on most personal computers, are indirectly consumer products. Global personal-computer shipments surged more than 20% in the March quarter, partly fueled by robust consumer demand for the new Windows 7 operating system.
In the March quarter, Microsoft earned $0.45 per share, up 36% and $0.03 above the consensus estimate. Revenue rose 6% to $14.5 billion. Sales of Windows jumped 28% in the quarter, powered by strong demand for Windows 7. More than 10% of the world’s personal computers run Windows 7, which the company calls “by far the fastest-selling operating system in history.”
Microsoft shares fell on the earnings news, possibly because of weakness outside the Windows business and a larger loss from online services. But the Windows 7 momentum should continue, and at least six analysts raised their share-price targets for Microsoft in the days after the announcement. The consensus calls for profit growth of 22% this year and 12% next year, numbers Microsoft seems capable of topping, particularly if the economy continues to recover. Microsoft is a Long-Term Buy.