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Published: July 15, 2009
If you want to truly tap into the
exciting developments taking place in Brazil, then entrenched
consumer-oriented companies like Companhia Brasileira
Distribuicao (NYSE: CBD) are your best bet. Think of the
diverse retailer as Kroger, CVS, Wal-Mart, and Best Buy all
rolled into one.
CBD is one of Brazil's largest food sellers, controlling 13% of
a large, but still fragmented grocery market. The firm has a
variety of store formats that cater to a full-range of clientele
-- from the budget-minded Sendas chain to the upscale Pao de
Acucar supermarkets.
The company also owns general merchandise superstores that are
stocked with all types of goods. Its Extra/Eletro outlets
attract shoppers looking for electronics and home appliances,
while local gas stations and convenience stores round out the
portfolio. Overall, the company manages 600 retail
establishments that take in nearly $10 billion in annual sales.
CBD's geographic footprint extends throughout most of Brazil's
more affluent and developed regions along the Atlantic seaboard.
Its stores are concentrated most heavily in Sao Paulo -- the
largest metropolitan area in South America. This booming state
accounts for $550 billion in goods and services each year --
greater than the total economic output of Egypt.
Cosmopolitan Sao Paulo is filled with museums, art galleries,
luxury hotels and five-star restaurants. Its prosperity is a big
reason why CBD (which rings up over 530 million purchases
annually) has seen average tickets climb from $15.55 to $18.66
over the past four years.
CBD has several sustainable
advantages over its competitors -- as you might expect from
a dominant industry leader with healthy returns on capital.
Aside from impressive distribution infrastructure, the firm
has an extensive selection of exclusive, private label
brands that generally occupy the No. 1 or No. 2 position in
their respective categories.
I could also talk about improved inventory turnover or
reduced operating expenses -- but the bigger picture is much
more illuminating.
Brazil is a model for social mobility. Lower-income workers
are graduating to the middle class -- the so-called "B" and
"C" wage earners now represent 74.2% of the population, up
from just 48.5% a year ago.
Clearly, that powerful demographic shift is supporting
healthy top-line growth (revenues have expanded at a rapid
+19% annualized pace since the firm's IPO in 1995.) The
outlook is particularly promising for the electronics and
household appliances market, which is forecast to double
from $30 billion to $60 billion in the next five years.
The highest paying wages in Brazil belong to those in the
utility business, which has seen a +300% increase from 2004
to 2006.
There are other growth drivers that will propel the company
forward over the next few years. For example, a partnership
with Bank Itau has placed financial service centers in the
firm's supermarkets, and has already attracted six million
clients in just four years. Online sales are exploding as
well -- up +168% last year.
Looking ahead, CBD will likely deliver same-store sales
growth in excess of 8% this year, impressive even after
stripping out the artificial impact of inflation. More
importantly, earnings are likely to follow suit.
Management's compensation is linked to profits -- and
executive bonuses don't kick in unless EBITDA growth hits at
least double digits.
Action to Take -->
Unlike the steep economic slumps that most countries are
mired in, Brazil's GDP slipped just a fraction of a percent
last quarter. Many expect the country to be one of the first
to bounce out of this recession. Until then, food will be
one of the last things consumers cut back on.
On the downside, these ADRs are technically preferred shares
with no voting rights. But in exchange, they are granted 10%
higher dividends, and the company has a policy of
distributing 25% of its profits to shareholders. And there
will be plenty of those over the next few years as a growing
number of mid/upper-class shoppers translates into busier
store traffic and rising average tickets.
Good Investing!
-- Nathan Slaughter
Editor
Half-Priced Stocks
P.S. In my latest issue of
Half-Priced Stocks, I list eight other companies
that should benefit from Brazil's booming economy --
including a telecom giant that has the potential to
appreciate +128%. To get more information on
Half-Priced Stocks and the names of the eight
companies,
visit this link.
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