Editor’s Note: This article is based on the 2022 edition of Morningstar’s Best Companies to Own. Find the full list of companies and read about our selection methodology.
Investors from most every part of the world exhibit a certain amount of home bias: the tendency to prefer domestic equities to international ones. This makes sense: Investors are likely more familiar with these brands and, consequently, are more comfortable putting their money toward them.
But in today’s investing world, “adding international exposure is one of the first steps toward a diversified portfolio,” according to Morningstar portfolio strategist Amy Arnott. If, for example, the U.S. dollar weakens, exposure to European or Asian equities can soften the impact.
With that in mind, how can stock investors tackle international investing?
First, it’s important to remember that at Morningstar, we don’t view investing through the lens of daily price movements or hot tips. We see owning a single stock as similar to owning a small part of the company or the underlying business itself.
Consider the amount of effort we devote to researching and comparing options before buying a car. It tends to be a lot, and it tends to work out well for our needs, exceeding expectations and providing a reliable form of transportation. This is the same approach we take to buying a stock.
One of the best ways to identify high-quality companies is by checking out the Morningstar Economic Moat Rating, which assesses a company’s competitive advantage. The term was coined by Warren Buffett, who also said, “The key to investing is…determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
We used the moat rating as a starting point to compile a list of the best companies you can own. As the best companies in our coverage universe, they have wide economic moats, the strength of their competitive advantages is either steady or increasing, they have predictable cash flows, and they allocate their capital effectively. (You can learn more about this methodology.)
Here are the 25 companies based outside of the United States, but available to U.S. investors, that made the cut.
Consumer defensive and healthcare are the most represented sectors on this list, with six companies each. Industrials is close behind with five companies, and the technology, financial services, and consumer cyclical sectors each have one.
This is a notable difference from the U.S.-based names on our list of best companies, where a majority of the firms resides in industrials. Financial services and tech are tied for second, while healthcare and consumer defensive sectors come in third and fourth, respectively.
A note of caution: This list is not a call to action for you to go and buy all these companies immediately. Rather, it is a list of stocks you should keep an eye on and look for attractive entry points. Even the greatest company can be a bad investment if you overpay, and many firms on this list are currently overvalued.
That said, we note two stocks on the list that have earned 5-star ratings as of April 19, meaning they are undervalued as per Morningstar Research Services’ fair value estimates.
They are Belgium-based Anheuser-Busch InBev (BUD), the maker of Budweiser and Corona beers, and the Chinese offshoot of Yum Brands, Yum China Holdings (YUMC), that operates brands like KFC and Taco Bell in China. Here’s what our analysts have to say about these two undervalued names from the list.
Anheuser-Busch InBev BUD
“Anheuser-Busch InBev has been acquisitive, having made transformative deals for Interbrew and Anheuser-Busch, and more recently acquiring Grupo Modelo, Oriental Brewery, and SABMiller. Management’s strategy is to buy brands with a promising growth platform, expand distribution, and ruthlessly squeeze costs from the business. The payback period for the SABMiller deal has been much longer than usual, however, despite management executing well on costs. We expect the merger and acquisition playbook will be on hold for a year or two more until AB InBev delivers its balance sheet.
“Still, previous acquisitions have created a monster with vast global scale as well as regional density. AB InBev has one of the strongest cost advantages in our consumer defensive coverage and is among the most efficient operators. Vast global scale, along with its monopolylike positions in Latin America and Africa, give AB InBev significant fixed cost leverage and procurement pricing power. This plays out in the firm’s excess returns on invested capital and best-in-class operating and cash cycles, asset turnover ratios, and working capital management. AB InBev delays payments to trade creditors more than 20% longer than its closest rival Heineken, and its free cash flow conversion has been consistently higher than peers in recent years. Driving AB InBev’s profitability is its majority stake in Ambev, the Latin American brewer that generates a whopping near 40% EBIT margin in beer in Brazil.
“AB InBev is well-positioned to exploit secular growth in several of its markets. In Latin America and in Asia, combined almost two thirds of consolidated EBIT, the consumer is trading up into premium global brands, and AB InBev holds a strong portfolio with Budweiser, Corona, and Stella Artois. Developed markets, on the other hand, are likely to remain fragmented and competitive.”
–Philip Gorham, equity director
Yum China YUMC
“The resurgence of COVID-19 cases has again put the Chinese restaurant sector under pressure. Several cities have returning to citywide quarantines, and travel volume during the early period of Chinese New Year is down 70%, placing pressure on the company’s near-term results. Nevertheless, we believe investors should find confidence in restaurants that possess the scale to be more aggressive on pricing near-term; give their customers greater access through robust digital ordering, delivery, and drive-through capabilities; and have healthy balance sheets when looking for restaurant industry opportunities.
“In our view, Yum China satisfies these investment criteria, and we identify several opportunities for it to gain share in the fragmented, $700 billion Chinese restaurant market. In China, chains account for roughly 17% of restaurant spending compared with 61% in the U.S. and 34% across the globe. Our conviction in rising fast-food penetration is underpinned by three long-term secular trends: longer working hours for urban consumers, rapidly rising disposable income, and ever-smaller family sizes. Coupled with strong brand recognition and an unrivaled supply chain, Yum China is set to be the prime beneficiary of growing Chinese fast-food spending. We’re also optimistic about Yum China’s various top-line drivers, including value platforms, menu innovations, new restaurant formats, enhanced digital marketing efforts (underscored by 300 million loyalty program members), unrivaled delivery capabilities, and brand expansion potential in Taco Bell, Little Sheep, Huang Ji Huang, and COFFii & Joy.
“While 2021 will still present pandemic-related disruptions, we find management’s longer-term goals of high-single-digit system sales growth, 17% restaurant margins, and low- to midteens EPS growth realistic (if not slightly conservative) given favorable China consumer demographic trends and the operating leverage inherent in its business model. Coupled with Yum China’s dividend (a $0.12 quarterly cash dividend was reinstated in the fourth quarter of 2020) and future share repurchases, we believe Yum China offers investors above-average potential.”
-Ivan Su, senior equity analyst
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