Betterware De Mexico: Top 2020 SPAC Is An Excellent Emerging Market Play
Summary
- One of the best performing SPACs of 2020 was this Mexican consumer product distributor and manufacturer.
- Take advantage of the fair valuation, high growth, and profitability with this emerging market play.
- Also, there is a 5% yielding quarterly dividend to go along with it for 2021.
- With all that and more, I believe this is a great long-term investment.
Convincing 2021 from a Dynamic Company
While there are often many new online retail or consumer product companies popping up around the world after the success of Amazon (AMZN), one company has tried to innovate the platform by using data analytics and a low-capital platform to expand rapidly in an emerging market. Betterware de Mexico (NASDAQ:BWMX) is a Mexican company that sells various organizational wares such as containers, cleaning supplies, and DIY-type gadgets. Currently, they have six major segments, with Kitchen supplies being the largest with 35% of net sales, while general home goods are 20%. The rest of the segments, commuting, laundry & cleaning, bathroom, and bedroom segments having mostly equal weight at about 11-12% each.
The company uses data analytics and business intelligence for both product innovation and sales expansion, as the power of data is quite necessary for the emerging market environment. It is important because it is not profitable to move into areas that are not the target economic demographic or those that are over-saturated with vendors already. Another SA contributor did well summarize the company’s background, and I recommend reading it. In this article, I will provide summary information, but focus on new data points that have come up since November.
Image 1: Source. A quick synopsis of the Betterware platform that differentiates itself from other competitors.
The company is based around a distributor/associate connection, with many feet on the ground to sell quickly and efficiently. Not to worry about pyramid scheme scenarios, as each level does not receive commissions for sales or recruiting. Rewards are based on discounts and a point system that provides non-monetary gifts. When associates (the customers or resellers) make enough orders in a certain area, the local distributors are the ones who deal with Betterware for obtaining inventory for delivery. In return for their work, distributors get lower reward rates, but pass higher volumes. Capital expenses are low due to this structure, as distributors cover the ground infrastructure required for delivery to associates.
With the combination of this innovative platform and their “best-in-class” technological tools, growth and profitability are easily found. For example, the company entered and became profitable in Guatemala in less than a year. With only about 20% household penetration in Mexico, the company has plenty of room for organic growth, while inorganic growth can be found with continued expansion into other countries such as Colombia, Costa Rica, and Peru. Further, innovation of products is unending, with about 300 new products or more being released per year. With the aid of new marketing campaign, website, and application in early 2021, the company will be able to better showcase its wares to the public and allow for maintained growth. As discussed in the most recent earnings call, the company has already seen a fivefold increase in visitors to the website since its first release, and this will lead to increased demand.
Image 2: Source. The future looks bright as the company has numerous growth paths and a novel platform to stand out from competitors.
The company’s products are designed in-house on a case-by-case basis based on analysis of the data analytics, while manufacturing is outsourced to China. Then, assembly and distribution are based in Guadalajara as a way of keeping the final product packaging local. This has led to only 0.58% defective claims, allowing for less waste of product and increased positive image by consumers. Meanwhile, according to Invesp, 30% of all online purchases, or 8.9% of brick-and-mortar items are returned, with approximately 20% of that being based on broken items. Although this is not a direct comparison, it should shine a light on the strong design, manufacturing, and assembly practices that Betterware exhibits. Further, an interesting cost saving is by having distributors cover final delivery and shipping, reducing total costs for distribution to about 4% of net sales.
This innovative platform has led to financial success, and the company recently became public one year ago. As shown in Image 3 below, the company was the highest performing SPAC of 2020 as investors decided the company is a leading consumer force in Mexico and will continue to be a star. Next, I will discuss the most recent financial report, and determine whether this share price appreciation is warranted financially.
Image 3. Source. The incredible performance of Betterware compared to other SPACs in 2020.
The Fundamentals
As can be seen in Image 4 below, the company has seen incredible growth over the past five or more years, and continues to do so during this new COVID era. Revenues have increased at a 62% CAGR; with growth of distributors and associates, and EBITDA increasing faster at 68%, and 71% respectively. Since associate growth is currently outpacing sales, a positive tailwind exists where the revenues will follow. With gross margins staying in the high 50s percentile and an EBITDA margin nearing 30%, investors can feel safe in future cash flow stability.
Common misconceptions about the company lie in the fact that some believe this is just another pyramid scheme type company, but it is easy to see that products are being sold and profits are being made. Positive cash flow was seen YoY, with $21.9 million, even after the company paid off $88.4 million in debt. This has led to a total debt/equity ratio of 70%, or 32% less than the sector on average. As shown in Image 5, Betterware is also ranked very highly in profitability metrics for their segment because of their innovative platform. I find that this establishes a sustainable environment to thrive in as a company.
In the most recent earnings report, the company states that the high growth seen in 2020 is extraordinary, and that revenue growth will return to the pre-pandemic levels of about 50% or so. Guidance expects a 46% increase overall, but I find this may be conservative. I think 60% would be a better value, as the transition to a pre-pandemic environment is slow. Meanwhile, the same margin levels should be maintained, continuing EBITDA growth through the year. The recent cash acquisition of GurúComm at the end of March will allow Betterware to begin a new technological and telecom based sales segment, and this may become another important long-term growth segment. However, the company states that this acquisition will not play any role in the 2021 guidance, but I believe it increases the probability of beating expectations. Next, to understand where the share price can end up by the end of the year, I will next look at the valuation and recent performance.
Image 4: Source. A look at the key financial points of note, and with an emphasis on the incredible growth that has been seen.
Image 5: Source. A view of the high profitability across all metrics. This measure is important as it allows for safety of growth, and a short path to long-term stable cash flow.
Price Expectations
Betterware was listed via a SPAC that was at about $9 per share. Since then, the company has quickly surged by 370% to over $37 per share. The current market cap is almost $1.5 billion, and this corresponds to a trailing price/sales of 3.66. While high for the sector, it is a better ratio than Amazon, with a 4.18, for example. Meanwhile, since Betterware has high profitability, a trailing GAAP P/E ratio of 77 is seen, which is in line with Amazon as well. However, the important point to note is that Betterware is seeing up to 3x the growth as Amazon, especially over the past year. Thus, it would be expected that while Amazon may revert back to its 5 year average P/E of 62, Betterware would not see this reversion to a lower value as the company continues to grow at a higher rate. Of course, short-term volatility is to be expected with the influence of broader market effects, but each new earnings report will reduce the valuation significantly and this will allow for share price increase. Regardless, I find that Betterware is still at a fair valuation, and that the company is in good territory for a long-term hold purchase.
Another form of shareholder capital gain is because of the initiation of a dividend. According to the recent fiscal announcement, the company will pay out 1.4 million Mexican Pesos over the year in a quarterly fashion. It is unknown whether this will continue over the coming years because this payout is a pre-planned lump sum that corresponds to a current payout ratio of 74%. This is a high percentage, and if the company wants to continue growing, Betterware may choose to lower the overall dividend after this year. At least, I would not invest in this company right now if you are hoping for a dividend growth scenario.
Image 6: Author created. Price has been relatively stable since the fast increase into 2021. Growth has continued while the valuations have not grown as high as the price due to high earnings growth.
Conclusion
Based upon the unique platform and well-executed business profile, I recommend Betterware as a solid long-term opportunity. The attention to data and a focus on innovative practices allows the company to differentiate itself from competitors. The platform is also especially crucial to outmaneuver competitors long term because of the low capex requirements and fast execution time. This is shown with the quick launch and profitability from their expansion to Guatemala, and continued high profitability in Mexico. By the end of the year, the company will be providing metrics and guidance for this segment alongside their Mexican data. Down the line, rollouts in other Latin-American countries will continue to provide growth. To go with this, the stock seems fairly valued at the moment, as the outstanding growth will easily reduce the valuation at this current share price. Lastly, this company also adds diversity to a stock portfolio as it is emerging markets play, with Mexico well positioned to see fast development over the next decade. A whole article could be made on that topic as well. Stay tuned!
Thanks for reading, and I would enjoy hearing your thoughts below.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in BWMX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (12)
