Two top global stocks to pick

THE CASE: VISA AND STARBUCKS

Visa set to benefit from the megatrend to noncash transactions and Starbucks is eyeing China.

Visa and Starbucks are well placed to benefit from megatrends in global consumer markets, according to Old Mutual Wealth Private Client Securities.

Visa

Research analyst Victor Mupunga says besides cheques, every form of noncash transaction has increased over the past decade, with debit and credit cards the biggest beneficiaries. Yet only about 40% of global consumer spending was via electronic means, suggesting there’s still significant growth opportunity.

Visa’s broadly considered a financial institution, but it’s not a bank that takes deposits or lends money. It provides a network facilitating fund movement between consumers, retailers and their banks.

Key drivers of Visa’s revenue and earnings are increases in the number and size of transactions: both are strongly supported by the megatrend to noncash transactions, Mupunga says.

Incumbents like Visa are best-positioned to gain. It’s built a deep “moat” around it in the form of its network effect, relationship with network stakeholders and brand equity, making it difficult for new entrants to disrupt the business, he says.

A key attraction is its business fundamentals. The revenue tailwind of increases in the number and size of transactions is expected to continue driving Visa’s earnings.

The group also has stable margins, significantly better than its peers, and its debt ratios are attractive.

Since listing, it’s been able to convert 100% of its net income into cash. In two of the past four years, it’s paid out all of its net income to shareholders in the form of share buybacks and dividends, Mupunga says.

“We believe that by investing in companies such as Visa, that are domiciled in developed markets but are capturing some of the growth in emerging markets, we are able to generate superior returns.”

Starbucks

A company that understands the value of building and maintaining a brand is Starbucks, Mupunga says.

Store openings in Japan and China earlier this year were accompanied by long queues.

Starbucks has positioned itself as an ideal “third place” (a belief that people want somewhere other than home or work for a few hours) for people across different generations, by offering free Wi-Fi and personalising the experience. It’s also transformed from predominantly selling ground coffee beans to a multi-product, multichannel business.

About 20% of revenue is derived from its food division and there’s a target to increase this to about a third in the next few years, Mupunga says.

Over the past decade, a key success has been aggressively selling coffee “in the aisle”.

This includes introducing ready-to-drink and packaged products and a foray into coffee pods.

He says Starbucks has been remarkably successful in the single serve (pod) market in the US, which is very attractive, growing at a rapid rate with high margins.

The group’s loyalty programme also plays a significant role in generating repeat customers, he says, adding that it’s freely integrated with its mobile app.

China is to be its largest market in the long run.

Mupunga says over the last decade, China’s coffee consumption’s grown about 16% a year.