Sentiment towards emerging markets has gone dramatically into reverse in recent years. Until recently, the business pages were bursting with articles heralding the decline of the West.
Last year, the story changed. Developed markets were booming again, the BRICs were toppling. Golden child China was doomed by its expanding credit bubble and ageing population. Investors started rushing for the exits.
But latest figures from globally-diversified brewer SABMiller (LSE: SAB) (NASDAQOTH: SBMRY.US) suggest the doom has been overdone. Targeted properly, emerging markets can still drive company profits.
SABMiller has been well rewarded for its strategy of targeting new consumers in Africa, Latin and America. The 4% rise in net producer revenue (NPR) in Q3 was almost entirely down to growing emerging market demand. NPR fell 6% in Europe, while US domestic sales to retailers fell 1.9%.
We do need another hero
So you thought the China growth story was over? Nobody told SABMiller, which posted double digit NPR growth. Group NPR in Africa grew 8%, thanks to thirsty Tanzanian lager drinkers, manly Nigerian brews Hero Lager and Trophy Lager, and strong South African sales of Castle Lite and Castle Milk Stout (which I’m desperate to try).
In Latin America, NPR rose 5% on strong lager sales in Colombia, Peru, Ecuador, and Central America, and even stronger soft drinks sales, particularly in Colombia and Peru. The emerging markets story is still intoxicating, if you get your strategy right. Sadly, unfavourable exchange rates against the dollar offset some of SABMiller’s gains.
Russia and Turkey disappointed, as did most of Europe, with the exception of thirsty Britain, where domestic volumes rose 9%, largely due to the now ubiquitous Peroni Astro Azzurro. Analysts are talking up SABMiller’s turnaround potential in Europe, but emerging markets are the key reason to buy this stock.
Isn’t diversification a wonderful thing? If you sell more than 200 beer brands across 75 different countries, there will always be some good news to outweigh the bad. Emerging markets may be slowing, but they’re still growing, and at rates the West can’t match.
The problem is, that trading at a heady 21.3 times earnings, these growth prospects are reflected in the share price. The stock now yields just 2%. Earnings per share are forecast to rise a tasty 10% to March 2015 and 11% the year after. SABMiller is a premium beer producer, but you must be willing to pay a premium price.
