The direct selling business has been under some pressure of late, with Avon Products, Inc. (NYSE:AVP) struggling and Herbalife Ltd. (NYSE:HLF) under a government investigation. That said, the direct selling approach has a lot of appeal in the fast-growing emerging markets. Now could be an interesting time to jump aboard, if you pick the right company.
Emerging
For example, the company projects that Asia alone will see an increase in the middle class from 500 million to 1.7 billion. That area accounts for virtually all of the expected middle class growth. Though not as exciting as the growth potential in Asia, the company expects Central and South America to see a 40% increase in the size of the middle class over the next few years, too.
Direct selling was an important part of The United States’ move toward an expanding middle class. So direct sellers and multi-level marketers have seen emerging economies as a way to repeat the success seen in now developed markets.
The Best of the Bunch
Tupperware Brands Corporation (NYSE:TUP) is probably the best performing direct seller right now. The company’s shares are hitting new highs and, aside from a 1.6% dip in 2009, revenues have been on an upward climb for a decade. Although the top line was flat between 2011 and 2012, that looks like it was the result of a weak third quarter in 2012. The fourth quarter and the first quarter of 2013 suggest that things are back on track.
The bottom line, meanwhile, has more than doubled over the past decade and dividends have been increased annually in each of the last four years. With over 60% of sales coming from emerging markets, Tupperware is well positioned to capitalize on the growth it expects to see in these regions.
Yielding nearly 3%, Tupperware is a good way for investors to get “direct” exposure to emerging markets. That said, recent share price performance has been impressive. Momentum investors might want to take a look, but more conservative accounts should probably wait for a pullback.
A Troubled Giant
Avon Products, Inc. (NYSE:AVP) is another big direct retailer. Although the makeup company’s top line has been growing fairly steadily over the past ten years, its profit margin has contracted from the mid-teens to the single digits. Last year was a particularly difficult one, though that isn’t surprising since there was a management shakeup.
Although shareholders have had to suffer through a period of red ink, such top level changes often result in the new leader making aggressive changes up front. Note that the changes at Avon Products, Inc. (NYSE:AVP) included a dividend cut. However, the company sees big growth potential in emerging markets. In 2011, emerging economies accounted for about 40% of worldwide beauty spending, but that is expected to grow to 50% by 2016.
Interestingly, Latin America represents nearly half of the company’s business today, while Asia represents just under 10%. That means the company has a lot of room to expand along with Asia’s growing middle class.
Avon Products, Inc. (NYSE:AVP)’s stock has held up surprisingly well despite the near-term headwinds. In fact, the shares are up around 25% so far this year. However, they remain well off the highs reached prior to the recession. A dividend cut and a 1% yield suggest that income investors should look elsewhere. Those looking for a turnaround might still find some value here as the new CEO works to improve performance.
A Troubled Player
A third big player in the direct selling space is Herbalife Ltd. (NYSE:HLF). The company has recently been in the cross hairs of hedge funds, which has led to a government inquiry of the vitamin retailer. Although off from its highs, the shares haven’t done as poorly as one might expect of a company whose business is being reviewed by the government as a potential Ponzi scheme.
And, despite the negative press, the top and bottom lines and the dividend have all continued to grow. With a yield of about 2.7%, this is a high risk turnaround option. In fact, at this point, the company’s shares are more likely to trade on news than underlying performance. Note, however, that the company is experiencing solid growth in key markets like China (first quarter sales were up 24%), Brazil (up 19%) and Korea (up 16%).
Unfortunately, the downside risk here is fairly large. Most investors should stay on the sidelines until the clouds clear.
Direct Growth
Direct selling is an aspirational business model. It isn’t perfect, but it can help people reach their dreams of living a middle class lifestyle. Tupperware is probably the best positioned to benefit from growth in emerging markets right now. Though Avon Products, Inc. (NYSE:AVP) is working hard to catch up, it has some housecleaning to get done. That could give it upside potential for those willing to wait out a corporate revamp. Herbalife Ltd. (NYSE:HLF) is best avoided by all but the most aggressive investors.
The article A Direct Approach In Emerging Markets originally appeared on Fool.com and is written by Reuben Brewer.
Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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