Emerging-market stocks are notorious for two things: growth and extreme volatility. But while that strong growth has padded many portfolios in the past few years, extreme bouts of volatility have also left more than a few investors searching for a more stable method to tap into the emerging-market growth story.
One of the best ways is with strong U.S. companies with aggressive emerging-market strategies. Caterpillar (NYSE: CAT) is one company that fits the bill, with more than 70% of its total revenue now coming from international markets like China, India and Brazil. McDonald's (NYSE: MCD) is also following the same path, a solid blue chip and industry leader that continues to expand in China.
But even though both of these companies have seen big gains in the past few years on highly effective emerging-market strategies, it pales in comparison to my favorite stock in the group.
This well-recognized U.S. company has executed an emerging-market growth strategy that has helped to more than double its earnings from 88 cents per share in 2009 to a projected $1.93 per share in 2012. That has lifted shares to an amazing gain of more than 300% during the same period. Take a look at the chart below.
The company I'm talking about is Domino's Pizza (NYSE: DPZ), a pizza-delivery company with a market cap of just $1.67 billion. While Domino's maintains strong market share and brand recognition in the United States, what most investors don't realize is that it's also an international juggernaut.
In its recent second-quarter results, the company announced that for the first time in its history it had more international stores than domestic, with more than 500 new openings in the last 12 months lifting its international store count above 5,000. This trend is showing little sign of slowing. In fact, Domino's raised its target for annual openings from 250-300 to 350-450 in late February after a strong start to the year.
But not all international opportunities are created the same, which is why the company is focused on high-growth emerging markets, particularly in India, the company's fastest growing market. As it stands, Domino's operates more than 500 stores in more than 100 cities in India, good enough for 50% market share in the country's booming pizza market. And with India's middle class expected to reach a staggering 600 million by 2025, the opportunities for well-established and highly scalable brands will be tremendous. In addition to India, Domino's also operates 46 stores in Brazil and 83 in Malaysia, creating the foundation for further penetration into lucrative Asian and Latin American markets.
But beyond growth opportunities in emerging markets, Domino's also gave itself a huge face lift in 2010 when it rolled out a brand new recipe designed to counter public perception that it produced a low-quality pizza. The company upgraded its supply chain, creating relationships with local growers to procure fresh ingredients, reconfigured its crust and upgraded to a sweeter sauce. All in, it was nothing short of releasing a whole new pizza, leading to huge sales and earnings gains in the past two years and helping Domino's earn the Pizza Chain of the Year award from the industry's leading trade publication.
Risks to Consider: Carrying significant exposure to input costs like cheese and bread poses a threat to Domino's margin profile. For the time being, the deflationary cycle has kept grain and milk costs steady in the past two years, but with the Federal Reserve and other central banks around the world committed to further economic stimulation, the situation should be monitored closely. Beyond inflation, Domino's could also be vulnerable to slower growth in emerging markets, which continue to be affected by uncertainty out of Europe.
Action to Take --> Domino's Pizza is a strong U.S. brand, but the company is currently executing a very effective emerging-market growth strategy that has helped to more than double its earnings in the past three years. With shares recently falling more than 25% during the volatile market periods of May and June, Domino's currently trades with a forward price-to-earnings growth (PE/G) ratio of just 1.23. Returning to the average PE/G ratio of 1.5 times for the year would have shares of Domino's trading at $37, good for a quick 22% gain.
--Michael Vodicka
Michael Vodicka does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.
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Author: Michael Vodicka