Profiting from small brands with big reach

Roger Montgomery

Montgomery Investment Management

Packed the car and ready to take a re-opening road trip? Enjoyed a responsible G&T during lockdown? If you have, you may be familiar with some of the brands I am about to discuss. 

What you may not know is that these businesses, whose products you may already be using, are listed global small caps. You may also like to hear they’re owned in the Polen Capital Global Small and Mid Cap Fund.

Warren Buffett famously defined the job of an investor thus; “Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, 10, and 20 years from now. Over time, you will find only a few companies that meet those standards -so when you see one that qualifies, you should buy a meaningful amount of stock.”

The idea of finding businesses that grow is a simple one that has been proven effective in hundreds, if not thousands, of research papers demonstrating a high correlation between share prices and earnings, earnings surprises or profitability measures such as return on incremental equity.

Additionally, Australian investors now have a universe of opportunities from which to select quality businesses demonstrating long runways for growth in revenue and earnings. Professionally managed portfolios such as the Polen Capital Global Growth Fund and Polen Capital Global Small and Mid Cap Fund’s provide true global reach, meaning investors are no longer limited to domestic equities.

Growth is a powerful force for investors. A company can grow in many ways including, but not limited to:

  • expanding its geographical reach, 
  • raising prices, 
  • vertically integrating upstream or downstream, 
  • broadening distribution channels, or 
  • widening or deepening its range.

Meanwhile, businesses must navigate new markets, regulations and customs, meet with increased competition, and challenges with respect to labour and funding.

A business that can successfully and sustainably grow is, therefore, a prized asset. And when successful execution meets a long runway for growth, there is only the market’s scepticism to overcome. Surmount that hurdle and the market will reward investors with higher share prices.

Finally, growth is worth that much more when interest rates are low and their returns punitive.

The team at Polen Capital’s Global Small and Mid Cap Fund, which we have just launched in Australia and New Zealand, have uncovered a portfolio of international businesses with demonstrated success, along with a global runway for sustainable above-average earnings growth. These businesses are considered small or mid-sized global businesses meaning all the benefits of investing in a small business as it becomes large may also accrue to investors.

And finally, Polen Capital is wedded to quality, selecting companies with enduring earnings driven by sustainable competitive advantages, superior financial strength, proven management teams and leading products/services. Polen holds the view that such exceptional companies not only have the potential to contribute outsized returns to their portfolios but are also inherently less risky thanks to greater earnings stability and financial strength.

Company #1: Thule Group

Thule is a Swedish consumer brand selling roof racks and dedicated car accessories for carrying tools, sporting equipment and camping gear. Many Australians will be familiar with Thule’s bike carriers, cargo boxes and streamlined roof racks. What you may not know is the company is listed or that Thule is the number one brand in its segment in 140 countries worldwide, commanding 50% global market share.

Thule has also expanded into the bags segment with a broader offer in both urban (bags and cases for electronic devices) and outdoor environments (sport and travel bags), through both its Case Logic and Thule brands.

The company’s growth is attributed to its innovation and its core brand which accounts for more than 85% of sales.

Thule Group has a growth goal of more than 5% organic growth in local currency every year. Growth is driven by their continuous investments as the market leader in their largest category, Sport & Cargo Carriers, and their niche segment in Recreational Vehicle Products, as well as by their focus on capturing market share in newer categories, such as strollers and luggage.

Company #2: Musti Group

Musti is probably a brand you’re not familiar with unless you live in Lapland. Musti is the owner of Lapland’s leading chain of pet stores commanding a 25% share of wallet. An almost fan-like customer loyalty stems from an observation that once a puppy starts on a particular food type, both the owner and the animal will maintain that relationship for 12 or more years.

Half of the company’s revenues come from the sale of its own branded products and growth is expected to be generated by accelerating market share growth, margin expansion, and in the near term the step change that has been the pandemic puppy phenomenon.

By way of example, the number of registered puppies grew by approximately 14 per cent in Sweden in April – June 2020 compared to approximately 5 per cent in January – March 2020. Finland and Norway saw similar increases in the number of registered puppies.

Puppy registrations continued apace in early 2021 with 31 per cent growth in registrations in Sweden in March 2021. Compared to the corresponding quarter previous year, the number of Musti Group’s new puppy customers increased by 44 per cent during the second quarter, clearly winning market share.

This growth in the number of registered puppies led to increased demand for pet products and thus higher growth expectations for the market.

Store openings will also support growth as the company focuses on market share gains.

Musti’s omnichannel business model combines the convenience of both store and online purchases. Stores provide an essential and convenient touchpoint and allow Pet Parents to explore products, receive trusted advice from Musti Experts and access pet services. This is complemented by Musti’s strong online channel.

Company #3: YETI Holdings

YETI is a leading outdoor lifestyles brand selling the highest quality and arguably most expensive coolers – what we in Australia call eskys. Despite the high prices, the company commands a cult-like following.

An omnichannel approach means the company has a network of stores, which is complemented by an online presence. Importantly, only 10 to 15% of sales are outside the United States, suggesting a huge global opportunity.

In the first quarter of 2021 YETI reported a net sales increase of 42% bringing total revenue to $248 million, compared to $174 million during the same period last year. Net profit increased from $8.5 million in Q1 2020 to $30.5 million this year. The stellar results represent the highest growth reported by the brand since becoming a publicly-traded company.

As consumers embrace significant growth in active, outdoor lifestyles, YETI’s outdoor drinkware, coolers and equipment position it to generate and build upon massive customer enthusiasm for the brand.

Company #4: Fevertree Drinks

Launched 15-odd years ago alongside an explosion of craft Gin making in Britain and listed in the UK, Fever-Tree is a supplier of high-end or premium drink mixers to Europe, the United States and globally. I wouldn’t be surprised to hear you know of this brand because US and Australian sales are soaring. Australian sales were up 108% in calendar 2020.

Despite the premium moniker, FeverTree is now the market leader by value in the mixer category with 40% share, compared with Schweppes’ 33%. In 2021 Fever-Tree became the mixer-brand in more households than any other.

The company’s ambition is to grow its global opportunity. Re-opening is an obvious boost because ‘on-trade sales’, which account for about 45 per cent of revenue, are sales to the hospitality and leisure sector. New product launches, increasing brand strength, growing presence, marketing investments, and relationships across the industry mean sales are already exceeding pre-COVID-19 levels across all regions.

Fever-Tree is emerging from the pandemic in a very strong position. While logistics costs are high and placing pressure on margins, the company’s asset-light business means margins will surge when costs revert to pre-pandemic conditions.

Throughout the last 18 months, the company has maintained its long-term focus by investing in the business, the team, innovation and the brand to capitalise on longer-term structural growth opportunities. This will of course be essential to ensure longevity should the current fondness for Gin be replaced by something else, but of course, the major drink categories have been with us for generations.

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Roger Montgomery
Chief Investment Officer
Montgomery Investment Management

Roger Montgomery founded Montgomery Investment Management, www.montinvest.com in 2010. Roger brings more than two decades of investment, financial market experience and knowledge. Roger also authored the best-selling investment book, Value.able.

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