We conclude our two-part series on Sources of
Competitive Advantages in EM by naming the
companies with the Best Business Models in each of 26
different industry groups in our proprietary database of
650 non-financial firms. The resulting List is shown
opposite. These firms passed all of the following criteria:
1./ High level of average profitability (defined by RNOA)
over the business cycle within their industries.
2./ Low variance (<1.0x) of RNOA over the cycle.
3./ An Altman Z-score above 1.8 as an indicator of
balance sheet strength.
4./ Positive assessment by Morgan Stanley analysts of
the medium to long-term strength of the business model.
5./ Market capitalization greater than US$1.0bn and
daily trading volume of at least US$5mn.
The List offers broad exposure to high-quality
stocks in EM for the long run. On a geographic basis,
14 of the 26 firms are Asian, 7 from EMEA, and 5 from
Latin America. From 1998, an equal-weighted portfolio
beginning with the 12 firms which were then publicly
quoted and rising to the full 26 over time has
outperformed the MSCI EM index ex-Financials each
year. Relative outperformance over this period has
amounted to over 1,000%.
The valuation of the Best Business Models List (median
2011e P/E of 11.8x and P/B of 2.9x) is in our view
attractive, suggesting a good opportunity to accumulate
these stocks.
Focus list changes: we are making a number of
changes in our GEMs and APxJ focus lists to implement
ideas from our Best Business Models List. See inside.