3 Dominant International Opportunities

Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After buying in to many bad international investments on my CAPS account, and even a couple smaller plays in my own personal portfolio, I am extremely hesitant to jump into many foreign markets, particularly China.  Having lost money and many valuable CAPS points over the last 2 or 3 years due to scams, creative accounting, and "reverse mergers," I never thought I'd find myself interested in Chinese stocks or internationally based companies anytime soon.

Well, it turns out I was dead wrong.  With the SEC on the prowl, and a trio of stocks who have a dominant position in their market, I can't help but take a deeper look. With Baidu (NASDAQ: BIDU) growing up as the Chinese Google, Arcos Dorados (NYSE: ARCO) making its run as the Latin American franchisee for McDonald's, and Guangshen Railway (NYSE: GSH) being the only major Chinese railway stock, I can't help but consider making a new international investment.

Without further ado, here's a look at my 3 dominant international stocks, starting with my favorite of the group, Baidu.

It's a Mobile World

Valuations:  Simply put -- there aren't many better valuations out there -- it’s just a matter of whether or not their accounting can be trusted.  With a clean slate so far, however, I don't want to stand on the sidelines simply out of fear.  Yes I know, fool me once shame on you, fool me twice shame on me, but I would hate see Baidu's stock continue growing exponentially while I wait for bad news that may never come.

Posting a Forward P/E of 18 and 5 Year PEG of 0.66, Baidu's growth potential is selling for a huge discount.  Pair that up with over $3 billion in cash and this is a company with a fully loaded growth gun.  Compared to its 5 year P/E average of 44, Baidu is trading at valuations it hasn't seen since the '08 crash.  Versus Google's lower growth rates and higher peg of 1.2, Baidu looks flat out cheap.

Catalysts:  They literally are everywhere; it is just a matter of time for investors.  With less than 50% of China having internet access, compared to America's 80% mark, Baidu's first growth runway is blatantly apparent.  Second, only 20% of Baidu's views came from mobile searches, a number it hopes to greatly expand upon.  According to Trefis, 33% of Google's share price comes from its mobile search capabilities, showing the two search giants future mobile potential.  Similarly, its mobile maps unit reported daily user growth of 1,000% in 2011 alone.  Much like Google, Baidu is leaning on its maps to drive local searches and stronger Revenues.

Finally, Baidu is a true Rule Maker, something I was pounding on the table about in a previous blog elaborating upon Baidu's long-term prospects.  Boasting amazing margins and ridiculous growth rates, the company's growth story speaks for itself.

It's Not Mexican Food; It's McDonald’s in Latin America

Valuations:  Trading with a P/E of 25, Arcos Dorados may seem to be an expensive stock, but its 5 year PEG of 0.5 says otherwise.  While an investment in a company based solely on its future growth can be dangerous, the McDonald’s of Latin America has the brand recognition to propel investors to large returns.  Furthermore, with a 1.7% dividend, Arcos Dorados gives investors something in return for waiting on the company's future growth.

Catalysts:  Once again we've got catalysts everywhere, as the "junior McDonald’s" looks to follow in its elder's footprints with its march across Latin America.  As Fool contributor Maxx Chatsko explains, "McDonald's has over 14,000 locations in the U.S. alone, or about one restaurant for every 22,000 people. Arcos Dorados has 1,880 locations total, or about one restaurant for every 269,000 people in the countries it serves."  A growth runway couldn't be more apparent in simpler terms.  

Furthermore, with the largest market share in the Latin American fast food space at 10% --3x as big as its nearest competitor in Burger King-- Arcos Dorados has a head start in the race to saturate the market.  Throw in 300+ McCafes and 1,800+ of the company's highly profitable Dessert Centers and they have strong peripheral growth plays as well.  Generating 26% and 8% of Arcos Dorados' Transactions and Revenues respectfully, the company has successfully dialed in on the cultures sweet tooth.

Finally, with a storefront expansion goal of 5-10% annually, Arcos Dorados plans on growing Revenues by 10-15% each year.  Considering that 47% of the company's stores have been re-imaged, they are banking on the McDonald's success story of the last decade, when the store's improvements lead to a bolstered image and increased Revenues.

A Cheap, Profitable, Dividend Paying Railroad

Valuations:  Reporting a Price-to-Book ratio of only 0.72, investors skepticism towards Chinese stocks can clearly be seen.  However, Guangshen has very real components (railroads, rail cars, equipment, etc.), that all have tangible value.  Furthermore, the company's 3.2% dividend is very real as well, and has grown over the last 4 years.  With a Payout Ratio of 47%, the company's future is not at risk by paying the dividend, and should be able to support further increases with its Revenue growth.

Catalysts:  While this one could be seen as a true value play being so far below its Book Value, it also has many catalysts on its side as well.  Despite slowing growth in China, the country is still growing at an amazing pace, regardless of what was expected by economists.  With that, China will continue to need coal for its upcoming growth plans, along with many other basic building materials.  And that only factors in Guangshen's freight operations.  Pair that up with the millions of passengers the company shuttles along each year and the growth runway is clear to see.  Regardless of its one child policy or not, a growing Chinese population is still prevalent, only leading to future passenger train growth.

A Few Foolish Final Thoughts

While we may not know which Chinese companies are cooking their books, we can't point fingers at Baidu and Guangshen for simply being based in the same country.  With valuations coming in at tremendous levels, on the growth side for Baidu, and the value side for Guangshen, I don't believe the current opportunity can be passed up.

As for Arcos Dorados, I firmly believe that it is only a matter of time before the company's EPS catches up with its booming revenue growth.  They will follow in McDonald's footprints and will expand their leadership position in Latin America -- all while raising their dividends.  With CAPS calls made on all 3 stocks currently, I see their current prices as buying opportunities for investors seeking to diversify with long-term international investments.

joryko has no position in any stocks mentioned. The Motley Fool recommends Baidu, Google, and McDonald's. The Motley Fool owns shares of Arcos Dorados, Baidu, Google, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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