Wednesday, July 6, 2011

Looking at Hidden Champion Corticeira Amorim Part 1

Corticeira Amorim (http://www.bloomberg.com/apps/quote?ticker=COR:PL)

Price €.99 (7/5/2011)

I have been reading the book Hidden Champions of the Twenty-First Century: The Success Strategies of Unknown World Market Leaders and one of the companies mentioned in the book is Corticeira Amorim a cork company based on Portugal.  I had looked at this company back in February but took a pass because the 2010 financials hadn't been released yet.  When I saw the company mentioned in the book I decided to take a look again and I really like what I found.

I wanted to break this post into two, the first portion I'm going to describe the business and what makes it a hidden champion in addition to some highlights.  In the second post out later this week I will dig into the financials that support this post.

I wanted to start with something I had read recently which is the thought that an investment thesis is too complex if it can't be written on the back of a napkin.  I liked this because it really makes an investor focus on what's important to a thesis.  When looking at a potential investment there is a lot of information to be sifted through, and the napkin approach distills the information to a nice tight thesis.  Without further ado:

Corticeria Amorim is a compelling investment based on the following factors:
-Ability to deliver in all kinds of markets since 1870
-Global market leader in the cork niche
-Insiders purchasing shares above current prices
-Company buying back shares
-Company trading at a reasonable value EV/EBIT of 5.5
-ROIC of 11%
-Latest dividend of €.10 for a 10.99% yield
-Company is associated with Portugal giving the cheap price while over 80% of business is from outside Portugal, export oriented.
-Has paid down 50% of debt in the past two years.

The idea behind the hidden champions is companies that are global market leaders that most people outside of the niche market have never heard of.  The companies focus on one product or idea, heavily invest in research, are conservatively run and financed, have decentralized business units, export oriented and growing.

Business Overview

Amorim operates in four business segments, Cork Stoppers, Cork Insulation, Floor and Wall Coverings, and Composite Cork.  Amorim embodies one aspect of hidden champions in how they view their business units.  Each business unit is run independently and operates almost as a separate company.  This gives the management in control flexibility and reduces layers of beurocracy.

Cork Stoppers - This is the business unit most people think of when they think of cork, wine bottle corks.  The Cork Stoppers unit supplies the big wine markets, France, Italy and Spain among others.  In the major wine markets wine consumption has increased 1.3% in 2010.  The stopper group increased volume 13.3% in 2010.  Gross margin for the division increased 18% over 2009 and EBIT increased 23% due to operating leverage.

Cork Insulation - The insulation business unit deals with cork sheets used as building insulation.  The sheets of cork are very dense, stable at high temperatures and provide excellent acoustic and thermal insulation.  I attempted to find an R-value for cork insulation but in doing so realized the R-value is a American industry created metric that favors fiber insulation.  Sales for this unit increased 5% in 2010 mainly in Europe and the Middle East.  The gross margin increased 7% over 2009 and EBIT increased 13%.

Floor and Wall Coverings - This business unit was founded in 1978 and located in Portugal, the unit designs and builds flooring composed of cork.  The products are environmentally friends, cost effective, retain heat well and don't retain dirt.  The products are sold to wholesalers who sell to the DIY market and professional installers.  Sales in this unit grew 7.6% in 2010 and the company achieved some cost reductions with regards to compensation.

Composite Cork - The composite cork unit focuses on integrating cork into non-standard applications, such as automotive gaskets, thermal protection shields, footwear and electronics.  This unit really took off in 2010 with sales increasing 23% and EBIT increasing 200%.  The large increase in EBIT was due to operating leverage and increases in production efficiency.

In the 2010 annual report Amorim has a picture showing sales by business unit:

I want to make a note, the Raw Materials unit is mostly internal sales as seen by the small amount of sales, they mostly supply the material for the other business units.  The picture is great in showing that Amorim is nicely diversified across business units, while the stopper unit is the biggest at 58% composite cork and the floor and wall covering units have sizable pieces as well.

Export Oriented

A large feature of hidden champions is that while they might be located in a home market most of their business comes from outside of the home market.  Amorim is no exception to this rule, while they are located in Portugal over 95% of their sales come from outside of their home market.  The following picture from the annual report shows this well:
The company also has sales offices in over 100 countries and major operations in Portugal, Spain, France, Italy, Germany, Poland, the United States, Brazil, Argentina, China, Tunisia and Australia.

The advantage for a company that's export oriented is that they have the ability to weather local market recessions better than home market companies.  As proof to this Amorim didn't experience any losses in 2008 and 2009, some of their business units in emerging markets actually posted record growth proving diversification works.

Going into 2011 the company devotes a section of their report to the economic conditions of Portugal in which they state they expect Portugal to head into another recession in addition to the sovereign debt crisis.  While this is not good for the country the company believes they won't be affected largely due to the strength of their worldwide operations and export nature.

Niche Leader

One common theme through all hidden champions is that they are the leader in their own niche market, Amorim is no exception.  Amorim reports the following market shares:

  • Cork stoppers: 25%
  • Floor and Wall Coverings: 65%
  • Composite Cork: 55%
  • Insulation Cork: 80%

In addition to being a market leader they aren't satisfied and invest in additional research and development.  Some of the current projects underway are to discover new applications for cork, research TBA in cork, and study how to remove dust from corks in wine bottles among other items.

Ownership

One last thing I want to mention is the ownership structure of the company.  An interesting point about hidden champions is that many of them aren't publicly traded.  According to the author between 6 and 9% of hidden champions trade on public exchanges.  Most are private family run companies.  Amorim blends a bit of both styles when it comes to ownership structure.

While the company trades publicly and is available for purchase to anyone with a brokerage it is 75% owned by the Amorim family through a private fund.  Various members of the family serve on the board and in executive roles.  Two other funds own stakes reducing the float to about 15% of outstanding shares.  In addition to this the company has been buying back shares in 2010 reducing the float by about 3%.

Talk to Nate about Corticeira Amorim

Disclosure: Long Corticeira Amorim.  In addition for each purchase made through the Amazon link I will receive a small commission from Amazon.  The price for the item is the same through my site as it would be if you visited Amazon.com directly.

2 comments:

  1. Hello
    Interesting, thanks for the idea, I'll look forward to your next post.
    You might be interested by a comparison with OENEO in France (ticker SBT, trades in Euronext Paris), a company that makes cork stoppers.
    Regards.

    ReplyDelete
  2. Caque,

    Thanks for the heads up on OENEO, I was actually looking at them for part two of this post as a comparison company.

    Nate

    ReplyDelete