Best International Businesses to Own: 2022 Edition


Editor’s Note: This article is based on Morningstar’s 2022 Best Businesses to Own. Find the complete list of companies and discover our selection methodology.

Investors in almost every region of the world display a certain home bias: the tendency to prefer domestic equities to international equities. This makes sense: investors are likely more familiar with these brands and, therefore, are more comfortable investing their money in them.

But in today’s investing world, “adding international exposure is one of the first steps toward a diversified portfolio,” according to Morningstar portfolio strategist Amy Arnott. If, for example, the US dollar weakens, exposure to European or Asian stocks can mitigate the impact.

With this in mind, how can stock market investors tackle international investing?

First, it’s important to remember that at Morningstar, we don’t view investing through the prism of daily price movements or sound advice. We consider owning a single share to be similar to owning a small part of the underlying company or business itself.

Consider the amount of effort we put into researching and comparing options before buying a car. It tends to be a lot, and it tends to serve our needs well, exceeding expectations and providing reliable transportation. This is the same approach we take to buying a stock.

One of the best ways to identify high-quality companies is to check the Morningstar Economic Moat Rating, which rates a company’s competitive advantage. The term was coined by Warren Buffett, who also said, “The key to investing is…determining a given company’s competitive advantage and, more importantly, the sustainability of that advantage. Products or services that have wide and durable moats around them are those that offer rewards to investors.”

We used the moat rating as a starting point to compile a list of the best businesses you can own. As the best companies in our universe of coverage, they have wide economic gaps, the strength of their competitive advantages is stable or increasing, they have predictable cash flows and they allocate their capital efficiently. (You can read more about this methodology.)

Here are the 24 companies based outside the US, but available to US investors, that have made a difference.

Consumer defensive and healthcare are the most represented sectors on this list, with six companies each. Industrials follow closely with five companies, and the technology, financials and consumer discretionary sectors each have one.

This is a notable difference from the US-based names on our Top Companies list, where the majority of companies reside in industries. Financial services and technology tied for second place, while the defensive sectors of health care and consumer goods ranked third and fourth, respectively.

A caveat: This list is not a call to action for you to buy all of these companies immediately. Rather, it is a list of stocks you should watch and look for attractive entry points. Even the biggest company can be a bad investment if you pay too much, and many companies on this list are currently overvalued.

That said, we note two stocks on the list that earned 4- or 5-star ratings as of Feb. 11, meaning they are undervalued according to Morningstar Research Services’ fair value estimates.

This is the Belgian company Anheuser-Busch InBev (BUD)the maker of Budweiser and Corona beers, and the Chinese branch of Yum Brands, Yum China Holdings (YUMC), which operates brands like KFC and Taco Bell in China. Here’s what our analysts have to say about these two undervalued names on the list.

Anheuser-Busch InBev BUD

“Anheuser-Busch InBev has made acquisitions, having entered into transformative deals for Interbrew and Anheuser-Busch, and most recently acquiring Grupo Modelo, Oriental Brewery and SABMiller. Management’s strategy is to buy brands with a growth platform promising, expand distribution and reduce business costs. The payback period for the SABMiller deal was much longer than usual, however, despite good cost management. We expect the M&A playbook to be suspended for another year or two until AB InBev delivers its balance sheet.

“Nevertheless, previous acquisitions have created a behemoth with vast global scale as well as regional density. AB InBev has one of the most significant cost advantages in our defensive consumer coverage and is among the most Extensive global scale, as well as its monopoly positions in Latin America and Africa, gives AB InBev significant fixed cost leverage and sourcing pricing power, resulting in returns surplus to invested capital and best-in-class operating and cash cycles, asset turnover ratios and working capital management InBev delays payments to trade creditors by more than 20% longer than its closest rival Heineken, and its free cash flow conversion has consistently outperformed its peers in recent years. AB InBev’s main feature is its majority stake in Ambev, the Latin American brewer that generates a huge EBIT margin of almost 40% in beer in Brazil.

“AB InBev is well positioned to exploit secular growth in many of its markets. In Latin America and Asia, which together account for nearly two-thirds of consolidated EBIT, consumers are turning to premium global brands AB InBev has a strong portfolio with Budweiser, Corona and Stella Artois Developed markets, on the other hand, are likely to remain fragmented and competitive.”

Philip Gorham, Equity Director

Yum China YUMC

“The resurgence of COVID-19 cases has again put China’s restaurant industry under pressure. Several cities have reverted to citywide quarantines, and travel volume at the start of Chinese New Year has declined. 70%, putting pressure on the business in the short term, but we think investors should trust restaurants that have the scale to be more aggressive on pricing in the short term; their customers better access through strong digital ordering, delivery and drive-thru capabilities; and have healthy bottom lines when looking for restaurant opportunities.

“In our view, Yum China meets these investment criteria, and we identify several opportunities for it to gain share in the fragmented $700 billion Chinese restaurant market. In China, chains account for about 17% of restaurant spending, compared to 61% in the US and 34% globally. Our belief in the growing penetration of fast food is underpinned by three long-term secular trends: longer working hours for urban consumers, rapidly increasing disposable income, and ever-smaller families. Coupled with strong brand recognition and an unrivaled supply chain, Yum China stands to be the main beneficiary of growing Chinese fast food spending. marketing efforts (highlighted by 300 million loyalty program members), unparalleled delivery capabilities and potential for brand expansion at Taco Bell, Little Sheep, Huang Ji Huang and COFFii & Jo y.

“While 2021 will still present pandemic-related disruptions, we believe that management’s longer-term goals of single-digit system sales growth, restaurant margins of 17% and EPS growth of low to mid-teens are realistic (if not slightly conservative) given China’s favorable consumer demographic trends and the operating leverage inherent in its business model. Coupled with Yum China’s dividend (a quarterly cash dividend of 0, $12 was restored in the fourth quarter of 2020) and future share buybacks, we believe that Yum China offers investors above-average potential.

-Ivan Su, Senior Equity Analyst

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