Latin America has long been seen as a land of commodity exporters, stretching unbroken from Bolivia’s colonial mines in Potosí to the still rich Buenaventura deposits in Peru. This image of being an extractor is hard to shake, especially since the region has plenty of mineral veins to feed China’s insatiable commodity thirst. Even Chile, which has one of the most sophisticated and egalitarian economies in Latin America, relies on copper for 40% of its exports.
Yet a handful of nimble consumer-oriented companies are turning in financial results that rival those of similar companies in faster growing markets, drawing the attention of investors from the dusty American heartland to the jam-packed boardrooms of Tokyo. An exhaustive LatinFinance analysis of operating margins from top-performing corporations shows how some of the region’s highest flying airlines, beverage companies, retailers, telecommunications providers and even cement companies stack up versus their global peers (see chart, Stacking Up, below).
Airlines
Of the top five fastest-growing flight routes globally, four are in Asia. Yet low labor costs and high aircraft utilization at Brazil’s Gol Linhas Aéreas Inteligentes give that carrier some of the highest operating profit margins in the segment – 36% in 2005 – beating out US-based low-cost phenomenon JetBlue and UK peer Ryanair, which posted margins of 14.7% and 34.9% respectively, and even Air China’s 27.5% margin. Also comparing favorably among hot names in the sector is Brazil’s TAM, which the international investment community discovered when it launched a highly successful secondary offering on the New York Stock Exchange in March. TAM reported an operating margin of 19.8% last year. The hefty profits are backed by strong sales growth, as Latin America is among the world’s top five fastest growing markets for passenger flights.
Beverages
Another global portfolio must-have these days is Mexican soft drink bottler Coca-Cola Femsa, which covers nine countries in Latin America and is the second-largest Coke bottler in the world. Coca-Cola’s operating margin in Latin America for 2005 was a jaw-dropping 47.8% – almost twice the Atlanta-based company’s global average of 26.3%. The next closest regional performer in terms of profitability is North Asia, Eurasia and the Middle East, with returns of 38% last year (see chart, Fizzy Fortunes, right).
Retail
Although nearly every major international retailer is clamoring to enter China, where an improved market structure offers access to 1.3 billion consumers, European retail chain heavyweights like Groupe Carrefour, Royal Ahold and Auchan are retrenching in Latin America and selling assets in tough-to-crack markets. France’s Carrefour, for example, unloaded its 29 stores in Mexico last year to local retailer Chedraui for $570 million. In Chile, department store SACI Falabella has expanded through both acquisitions and greenfield growth at home, as well as in Peru and Argentina, pushing into food, do-it-yourself and even finance. According to Deloitte UK, Falabella is the tenth fastest growing retail company in the world. Opportunities abound for retailers in Latin America, where consumer spending and credit is picking up. In a recent Deloitte study, four companies from developing Asia and the same number from Latin America placed on the consultancy’s list of the world’s top 50 growth retailers. In terms of profit margins, Mexican supermarkets like Organización Soriana and Controladora Comercial Mexicana beat out pan-Asian retailers Dairy Farm International Holdings and President Chain Store while also outperforming Carrefour and US supermarket chain Kroger (see chart, Rockin’ Retail, below).
Telecoms
While Mexican mobile carrier América Móvil is certainly a crowd-pleaser, its high operating margins are dwarfed by those of China Mobile, the state-owned enterprise that is the largest provider of wireless telephony in China (see chart, Calling for Profits, below). The Asian carrier has enormously high operating profit margins of over 55% in 2005, projected earnings per share (EPS) growth of 15% from 2004 to 2007 and no net debt. América Móvil, for comparison, reported an operating margin of 30% last year, projects EPS growth of over 40% from 2004 to 2007 and has a debt ratio of 1.1 times EBITDA. Both companies have projected 20% subscriber growth this year, although China Mobile had boasted 247 million at the end of 2005 versus América Móvil’s 93 million.
Cement
In terms of operating margins, Mexican cement group Cemex is running neck-and-neck with Switzerland’s Holcim and France’s Lafarge Group. Last year, Monterrey-based Cemex showed an operating profit margin of 23.2%, even as it swallowed RMC of the UK, a $5.8 billion acquisition. For comparison, Holcim showed a return of 25.5% and Lafarge 20.9%.
While they may not always match their Asian counterparts in performance, homegrown multinationals are ready to prove they can do better than the international groups that tried to carve out territory in Latin America before them. LF
Research by Günther Hamm