"Good artists copy. Great artists steal." -- P. Picasso
I want to believe that investors are artists and that Picasso was right.
See, I am a rookie, and putting price tags on companies leaves me self-conscious. It's overwhelming, the sheer amount of financial noise that the media spits at us, the uninitiated. To save face, I look to fellow Fool Uncle Brilliant (his politically correct nickname) for inspiration, borrowing his ideas -- or rather, siphoning his investing wits for my analysis and hoping that he doesn't notice.
So when I was entrusted with valuing Natura -- a Brazilian cosmetics company keen on gobbling up Avon's
Prove the market wrong
Uncle Brilliant's stock-picking style boils down to this: Find out what the stock market assumes, how it feels and reasons, and prove it wrong. Or, alternatively, defer to its judgment. The take-home lesson is, know your enemy -- er, market.
In the case of Natura, a discounted cash flow analysis at a 14% rate tells us that investors are betting on annual 9% sales growth over the next decade. The big question: Is the market right?
At first glance, 9% might seem too low for a company with a track record of 17.7% average revenue growth over the past five years. Looking closer, however, one can argue that such growth cannot continue unabated, with Natura already holding a 24% share in Brazil and facing fierce competition from Avon.
To make matters worse, the Brazil central bank's decision to fight inflation is crippling demand for cosmetics. During the first half of 2011, Natura's sales were up only 10.5%, from 21% over the previous year. The stock price plunged from a high of 49.90 Brazilian reais in January to just above 34 reais as of July 22.
But there's more
Still, I believe that the market is missing the big picture -- or, at least, a big chunk of it. Consider first the demographic shifts in Brazil. By 2020, 36 million people are expected to join the ranks of Brazil's middle class -- essentially swelling Natura's target consumer base by 40%. Add to that the increasing participation of women in the workforce, the anemic competition coming from the retail sector, and a whopping 4.5% to 5% GDP growth, and it seems hard to believe that all growth has been squeezed out of Brazil.
But even if it were, Latin America offers plenty of room for expansion. Currently, Natura operates in five of the world's biggest markets for beauty products -- Argentina, Chile, Peru, Mexico, and France -- where its market share in the cosmetics industry is still under 4% and sales are growing steadily at about 30%.
Then there is Mexico, conveniently situated across the border from the 50 million Hispanics in the United States who are likely to connect with the company's mission of representing the modern Latin American spirit.
Finally, Natura has just recently started to home in on its supply chain, and efficiency gains are lying ahead. In 2010, the company opened new distribution centers and hubs in Brazil, an investment that will lead to a reduction in delivery time and better customer satisfaction. Under way also is the establishment of community partnerships in locations outside Brazil to cut production costs through localization. In time, the gains of these investments will trickle down to the bottom line.
Great investors steal?
Stealing can help if you are not yet a match for the greats. Just remember: Don't copy. Copying can spoil the beauty of any good idea out there. Instead, steal shamelessly. Better yet: Steal great ideas shamelessly. There is Foolishness in theft.