The Wal-Mart (or something) of Latin America
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I’m sure by now investors are sick to death of this investing trope: the “Smaller Foreign Company-X is the Major US Company-Y of Emerging Market-Z”. Renren is the Facebook of China. Yandex is the Google of Russia. Arcos Dorados is the McDonald's of Latin America. I could go on and on. They are just phrases people say to get attention. Words that rarely ever mean anything. Renren isn’t really the Facebook of China. Yandex isn’t actually the Google of Russia. Although in the case of Arcos Dorados, it literally is the McDonald's of Latin America, so sometimes these types of descriptions are applicable.
At the risk of attracting the ire of those also tired of these types of descriptions, I present to you the Wal-Mart of Latin America … or the Safeway of Latin America. Maybe it’s the Home Depot of Latin America. The Macy’s of Latin America? Quite possible the Simon Malls of Latin America. It’s probably a little of all of those companies. Whatever you want to compare it to, I give you: Cencosud (NYSE: CNCO) the Something-or-Other of Latin America.
I can almost see some of your eyebrows rise in puzzlement. “Eh? Cencosud? Never heard of it. How do you even pronounce that?” If this is your first time hearing about the company, that wouldn’t be terribly surprising. It only started trading on the New York Stock Exchange less than two weeks ago (it previously was available only on the Chilean Santiago Stock Exchange). And it's likely that you didn’t see any of the talking-heads on CNBC mention Cencosud even once, because it didn’t go public though an incredibly overhyped IPO process. It instead came to life on the NYSE through a rather humdrum secondary offering of American Depositary Receipts (ADRs).
Since you are likely unfamiliar with Cencosud, I’ll give you a brief company overview before I tell you why I like this Something of Latin America (last time I’ll use that phrasing, I promise, scout’s honor). Founded in 1960, Cencosud is a retail conglomerate based in Chile. The company has operations in Chile, Colombia, Brazil, Argentina and Peru (a combined population greater than that of the United States). Cencosud has five primary business segments; supermarkets, home improvement, department stores, financial services (credit cards), and shopping centers. Cencosud owns 726 supermarkets across all four countries, 81 home improvement stores across Chile, Colombia and Peru, 47 department stores located all in Chile (with plans for expansion into Peru) and 25 shopping centers across Chile, Colombia and Peru.
Latin American still has an under-penetrated formal retail market, particularly in the food retail segment. This informal retail market can be categorized as small, local, independent and sometimes inefficient and underutilized. The mom-and-pop retailers of Latin America, if you will. Some reading this article might lament the demise of the mom-and-pop retailers in the United States. Whatever you feelings are on this subject, Latin American is overdue for a consolidation and transition to a more chain-store, department-store, big-box retail environment. It's going to happen. It's just a matter of who will be the ones to take advantage of this trend. Cencosud is positioned perfectly to profit from this transition, particularly in food retail.
As I mentioned earlier, Cencosud completed a secondary offering two weeks ago. It's using most of the proceeds from this offering (the equivalent of about $725 million US) for the purpose of acquiring and further expanding their operations, in particular to Brazil and Argentina. Cencosud will be using the funds from the offering to pay for the acquisition of a Brazilian supermarket chain and to purchase UBS London’s stake in their Argentinian supermarket chain.
Investing in Latin American can be a high-risk proposition. There are ways, however, to significantly lessen that risk. One way is to invest in the right countries. Chile is among the single most stable, prosperous and business-friendly countries in all of South America. When the rest of the world faced the global downturn in 2008, Chile’s relatively small government, prudent economic policies, sound financial institutions, strong rule of law and little foreign debt allowed the country to rebound quicker and continued to grow faster. According to the CIA World Fact Book, Chile’s debt is only 9.4% of GDP as of 2011, one of the lowest percentages on the planet.
With the election of a center-right billionaire businessman as president in 2010, Chile continues to be the most business-friendly country in South America, and Forbes ranked it among the top 25 in the entire world. For those looking to invest in Latin America, Chilean companies like Cencosud are a great and safe way to play this emerging market.
WhichStocksWork owns shares of Cencosud S.A. American Depositary Shares and Arcos Dorados. The Motley Fool owns shares of Arcos Dorados. Motley Fool newsletter services recommend Arcos Dorados and The Home Depot. 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. If you have questions about this post or the Fool’s blog network, click here for information.