Two of These Three Firms Have a Lock on Emerging Markets
Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While the developing world hasn't shown the type of prosperity many economists predicted, no one said that growth would happen overnight. So despite the recent stagnant growth in these nations, it is still important for consumer goods companies to establish their footing now in order to realize the massive profits that will come when these economies really gain momentum.
Estee Lauder is already profiting in Africa
Estee Lauder Companies (NYSE: EL) isn't just saying that it is going to reap the benefits of a growing middle class in developing nations; the company is actually doing it. It expanded to Lagos in 2012, and management has noted the successful transition. That has given the firm confidence to expand throughout Africa, specifically in Nigeria and Mozambique this year. The ability to thrive in Lagos tells me that the firm has what it takes to profit in the developing world.
If makeup catches on in these areas, which it appears to be doing, expect massive growth in the years ahead. Being the first to market in these nations gives Estee Lauder a ton of potential profits, at least in the next few years. Expect other firms to join the party after they see the company's success, however. That will eat away at market share, but it will take a while for other firms to be able to open up shop due to transitory lag.
Analysts see the move as a source of major gains. Revenue is expected to increase 4.9% this year and 6.3% next year. Earnings per share is pegged to rise 15% this year and 13% next year. Those estimates are within reason, but I expect the year-over-year revenue growth will only be possible if other firms don't consume some of the company's market share in developing nations.
Avon has stumbled out of the gate
Avon Products (NYSE: AVP) has not been as successful as Estee Lauder at international expansion, as evidenced by sluggish revenue in the nations it has attempted to spread to. The company's approach has been different, and this has likely led to lower sales. The firm's unsuccessful asset-light approach tells me that it needs to make adjustments if it wants to prosper in the future. That could include heavier investments in these nations, creating a lot of risk for shareholders due to the potential of decreasing margins.
The mistakes that the company has made in marketing to the developing world will likely harm the brand. This could prevent profits even if the firm does decide to take a more aggressive asset-rich approach in these countries. The company's struggling operational execution will be hard to overcome, as brand loyalty isn't strong right now, according to Morningstar.
Analysts anticipate the firm's revenue will suffer this year, decreasing by 3.3% before rising 2.3% next year. Earnings per share, however, is pegged to rise 29% this year and 22% next year. The difference in revenue and earnings per share could be due to lower operating expenses.
Colgate-Palmolive looks to prove itself again
Colgate-Palmolive (NYSE: CL) is the type of stock to own for a very long time. The company's management has always been stellar, and that means it will likely continue to invest in brands that people keep around. Its businesses will never really fade, as people will continually need to clean their homes and teeth. The company's products continue to drive profits forward, and the quality and affordability of those products will keep customers loyal. The company is managing to accomplish this in the developed world as well, and it is now gaining footing in the emerging markets.
While Colgate-Palmolive is already in nearly every household in the developed world, it will realize enormous profits as the developing world increases its disposable income. While living in Costa Rica, I noticed that many of the cleaning supplies there were made by Colgate-Palmolive. The company kept my armpits fresh and toilet seat shimmering, and it will do so for others in the developing world as well.
Analysts see moderate growth ahead. The firm is set to increase revenue by 2.6% this year and 5% next year. That translates into a 5.5% increase in earnings per share this year and a 10% increase next year. With developing world economies poised to spike, however, I think those estimates are relatively conservative.
Final take on these stocks
Estee Lauder is certainly the most attractive makeup firm due to its ability to capitalize in the developing world. While it is early to tell whether Avon will be able to manage its international expansion, stumbling out of the starting gate doesn't help matters. Finally, I think Colgate-Palmolive has the capital to support moving its successful business model out of the developed world and into emerging markets. Brand loyalty is perhaps maximized domestically, but things are just getting started elsewhere.
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