The Magellan stock picker has moved from big technology to beverages for his next long-term investment idea.
Speaking at the Magellan Annual Adviser Roadshow in Sydney on Wednesday, the group’s co-founder and chief investment officer Hamish Douglass revealed his top picks for global stocks.
Magellan’s largest single equity position is still in Google’s parent company, Alphabet, and the fund manager remains keen on Visa and Mastercard as the world moves toward a cashless economy.
But the latest business to join Douglass’s stable of global equities is Starbucks.
The American coffee company has 29,000 stores in 77 countries and generates 95 million weekly transactions. With a market cap of $74 billion, many investors may wonder what Magellan sees in the Seattle-based coffeehouse.
But Douglass sees a few tailwinds behind Starbucks, most notably its expansion into China.
The US business currently represents about 65 per cent of group earnings. China makes up about 12 per cent with 3400 stores.
“The future and the driver of this tailwind at Starbucks is actually all about China,” Mr Douglass said. “This is just a massive opportunity and a relatively small business at the moment.
An emerging middle class in China presents plenty of upside for popular consumer products, as Magellan has witness via its long-term holding in Yum! Brands, owner of KFC and Pizza Hut.
Mr Douglass said the Chinese consume less than one cup of coffee per day, but he is confident that this number will rise.
“The great thing about coffee is it’s addictive,” he said. “Once you get these people trialling this product they are very likely to continue to keep consuming it,” he said.
According to the Magellan CIO, Starbucks is planning on entering another 90 cities in China over the next five years.
“They are rolling out 600 stores per year in China – almost two stores per day,” he said.
“When they open a new store in Beijing, they generate around $700,000 in the first year. They get about 85 per cent return on their capital. In the smaller cities they are generating 87 per cent.
“There are very few places in the world where you can put your money to work at an 87 per cent return in the first year.”
Over a decade, Magellan expects Starbucks can grow its revenues in China by 14 to 17 per cent per annum.
Mr Douglass is confident this could drive up to 10 per cent NPAT growth for the US company.