Buy Commodities, Sell Brands. This has long been the investment philosophy of Warren Buffet.
The appeal of this approach is simple – brands have the ability to build customer loyalty and command a premium over their generic equivalents. This creates a sustainable competitive advantage for the company, allowing it to fend off competition and protect long-term profits. Investors that have followed this approach have been handsomely rewarded. (A great example is The Coca-Cola Co).
Below are two well known brands trading on the ASX that could power your portfolio in 2015.
Bega Cheese Ltd
Bega Cheese Ltd (ASX: BGA) owns the iconic Bega brand, Australia's number one selling cheese brand. It also owns Tatura which sells lactoferrin, infant formula and other dairy products.
The immediate outlook for the industry is not rosy as global dairy prices have continued to slide. This has prompted Bega to concede that achieving profit growth in FY15 is likely to be challenging. However the recent fall in the Australian dollar will provide some relief.
Thankfully the future holds more promise. The company signed a five–year deal worth $100 million with a Chinese supermarket group to provide UHT milk. Since the deal is struck directly with the retailer rather than with intermediaries, margins will be above average in this highly competitive market.
China's demand for milk and other dairy products is set to boom as the growing middle class adopts "westernised" diets and the one-child policy was abolished late last year. In fact the country's demand for dairy products is expected to double by 2020.
Bega's foray into the Chinese market has been given a significant boost with the signing of the Australia-China FTA in November. A similar FTA signed between New Zealand and China in 2008 has increased dairy export volumes by six-fold so far.
If the Australia-China FTA can emulate this impact than Bega's modest dividend yield of 1.7% could rise substantially in coming years.
Flight Centre Travel Group Ltd
The deteriorating local economy and weakened Australian dollar forced Flight Centre Travel Group Ltd (ASX: FLT) to issue a profit downgrade last week. Its shares have now fallen nearly 42% since early March.
Although the company generates 76% of EBIT from Australia, it has reduced its reliance on the Australian operations over the past four years. Offshore revenues now make up 50% of total revenue and EBIT growth during this period is nearly double that from Australia at 26% CAGR. Further it is undergoing a transformation from a travel agent to a retailer, and its non-travel businesses (i.e. bikes) are starting to make meaningful contributions.
This theme is set to continue with the company singling out the corporate travel segment in the UK and US as growth areas for the current year. More importantly it is looking to grow its share of European sales in the US leisure market, a $40 billion market that is larger than the Australian outbound market. With the recovery of the US economy underway this strategy is likely to be very lucrative.
Central to Flight Centre's ability to execute these strategies is the strength of its brands. FCm Travel Solutions, the company's corporate travel brand, was recently named Australasia's leading travel management company for the third consecutive year. The company is continuing to grow its brands and enhance its value proposition for customers by embarking on the NSP (Noble Selling Purpose) initiative.
The travel agent industry has been repeatedly under-fire over the past decade (think e-commerce, GFC and SARS), yet it has managed to bounce back every time. Flight Centre is a clear example of this, and with a dividend yield of 4.54% it could very well propel your portfolio.
