Many consumer staples companies provide some visibility into their business fundamentals (e.g., sales volumes and earnings) based on geography. Some break down their quarterly financial results either by geography (U.S., Latin America, Asia, etc.) and/or by product category (e.g., toothpaste, detergent, deodorant, etc.).
In today’s world, understanding a company’s geographical exposure—via quarterly reports or other information discovery efforts—is particularly helpful in trying to evaluate its current and prospective growth prospects. The countries in which a company does business are often more indicative of future growth than a company’s individual product categories, primarily because there are different trajectories of economic growth in various parts of the world.
Evaluating a company’s sales, earnings, and other financial results in a particular country or region allow an investor to determine which companies are benefiting from favorable global macroeconomic trends. In developed-country markets there typically aren’t major swings in sales and revenues from quarter to quarter. During the past few years, many multinational staples companies experienced from 0% to 2% volume growth in developed-market economies, and that tight range is largely due to consistently steady or negative GDP growth, low population growth, and moderate income growth.
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However, there has been significantly higher sales and earnings growth in emerging-market countries, where there is overall faster economic growth, rising populations, and relatively stronger income growth. Within the sector, companies have varying degrees of exposure to emerging markets, and those that have a sizable portion of their overall sales coming from these areas (see chart below, right) may have a much bigger secular tailwind behind their future profitability.
More specifically, in China some businesses have been growing volumes 5% to 15% during the past few years. Because all the manufacturers within a given category in China should benefit from the tailwind of strong category growth, it is very helpful to know a staples manufacturer’s exposure in the country.
Such information provides greater insight to me about a company’s growth potential than a financial report that shows only the aggregate global breakdown of sales and earnings for detergents, diapers, dishwashing soap, and other staple products.
Further, the mix of a company’s geographical footprint can vary significantly within the sector, which can have implications for its overall sales and profit growth. For example, 90% of the total sales volume for some U.S.-based cereal or soup manufacturers is domestic, whereas the U.S. market composes roughly 66% of total sales for some U.S.-based personal products manufacturers and less than 50% of sales for others.
More specifically, it would be more meaningful to know that a personal products maker sells more than 50% of its toothpaste in China, in a country with a growth rate that is three times faster than the U.S. and where the Chinese people are using 10% more toothpaste each year, than to know whether Americans will be consuming slightly more toothpaste and perhaps slightly less soup. This geographical lens into business fundamentals is also far more relevant than comparing sales of various types of products within a given country.
Thus, having visibility into the geographic sales trends of multinational staples manufacturers in both developed and emerging-market countries can help provide an understanding of the projected future growth rate for these companies.