\n\tBy Greg Peel<\/p>\n
\n\tThere would be few Australians unaware of Breville<\/span> electric household products. The company was established in 1932 and on my reckoning probably cemented its Vegemite-style<\/span> iconic status around about the seventies, by which time seemingly every home could boast a Breville<\/span> toasted sandwich maker, kitchen whizz<\/span> or similar device. Indeed, I do not joke when I recall that in my house, when I were a lad, we called toasted sandwiches “Brevilles”<\/span>.<\/p>\n \n\tNot much has changed since that time, but today the Breville<\/span> Group ((BRG<\/span>)) derives only 29% of its earnings in Australia. The other 71% are derived offshore. The most valuable offshore market for Breville<\/span> has proven to be, unsurprisingly, North America, and this is where the real story behind Breville's<\/span> investment thesis lies. When Americans were introduced to the George Foreman Grill several years back, they though it was revolutionary. It's success was immediate and arguably un-American<\/span>, given the GFG's<\/span> selling point was the draining off of fat. When the GFG<\/span> came downunder<\/span> Australians just shrugged – we'd been using similar products for decades, made by Breville<\/span> and others.<\/p>\n \n\tIf someone had said to you at the beginning of this year(*)<\/sup> that you should invest in Breville<\/span> – a consumer discretionary stock selling household electric goods in arguably the weakest consumer environment anyone in Australia can remember – you probably would have laughed. Just look at how the other listed consumer names are faring, you would have said, the electronic goods, clothing and department store retailers. But since January, BRG<\/span> shares have doubled in price.<\/p>\n \n\tAt its FY12<\/span> result, Breville<\/span> delivered flat earnings growth for its Domestic Electricals<\/span> division. Gerry Harvey would have given his right arm to see flat earnings growth, but it wouldn't have doubled his share price. The clue lies in Breville's<\/span> international revenues, which increased by 18% over the period. Having begun to make some inroads into the North American market, Breville<\/span> decided to put its prices up to reflect its product quality. A mistake? No. Breville's<\/span> offshore earnings grew 45% (Aussie dollar EBITDA).<\/p>\n \n\tWell a doubling in share price is nice work if you can get it, and investors are no doubt thinking the gate is now shut after the horse. But stock analysts staunchly disagree, noting Breville's<\/span> North American success has come from as yet only around a 6-7% market share penetration. In the greatest consumer market in the world – and one that appears prepared to pay up for quality – it seems the Breville<\/span> story has only just begun.<\/p>\n \n\t“Whilst near term share price consolidation is inevitable post a more than doubling to date in 2012,” suggests stockbroker Moelis<\/span> & Co, “the significant growth opportunities afforded by the North American operations were aptly highlighted [by 45% earnings growth] despite the subdued economic environment across all regions”.<\/p>\n \n\tThe analysts at RBS<\/span> Australia agree. They have initiated coverage on Breville<\/span> with a Buy rating in a report entitled “Not too late to the party”.<\/p>\n \n\tRBS<\/span> views BRG<\/span> as a “unique proposition” in the current environment as the significant growth potential it offers is not predicated on underlying market growth. Rather, it is predicated on further penetration into large offshore markets in which the company has been successful to date but has yet achieved only modest market share.<\/p>\n \n\tAnd success in the retail sector brings with it valuable cashflow. BRG<\/span> has not funded its offshore push with dangerous amounts of debt, and indeed RBS<\/span> believes that by the end of FY13<\/span> the company should have around 50 cents per share of cash sitting on the balance sheet. The lack of debt means the company can pay healthy, growing dividends and still leaves the door open for capital management.<\/p>\n \n\tAs the Moelis<\/span> analyst, who retains a Buy rating, points out, Breville<\/span> has not hit the US with its full suite of product lines all at once, so aside from further market share gains being available vertically there's also horizontal share to be gained as new product segments are introduced. RBS<\/span> offers further horizontal opportunities, this time geographic, as BRG<\/span> has only just begun its push into the burgeoning consumer markets of Asia.<\/p>\n \n\tOn initiating with a Buy rating, RBS<\/span> joins UBS, Credit Suisse and Macquarie as the only other FNArena<\/span> database brokers to cover the stock, all of whom retain Buy or equivalent ratings. (Moelis<\/span> is not a database broker.) UBS upgraded from Hold last month. RBS<\/span> has initiated with a target price of $$6.48 (Moelis<\/span> $6.40), to establish a new consensus target of $6.21.<\/p>\n \n\tThe consensus target suggests 9% upside from the current share price, and we acknowledge that BRG<\/span> has had a very solid run to here. However the successful investor never despairs the one that got away, but rather assesses every investment opportunity on today's merits. Today's consensus database forecasts suggest 11% earnings growth for BRG<\/span> in FY13<\/span> and 8% in FY14<\/span>, with dividend growth of 13% and 8% respectively. Those figures suggest a forward yield today of 4.8% and 5.2% on around a 70% payout ratio of dividends from earnings. See FNArena's<\/span> Stock Analysis<\/a>.<\/p>\n \n\tOn RBS<\/span>' earnings before tax (EBIT) forecast for FY13<\/span>, Breville's<\/span> forward multiple of 9.4x represents only a 6% premium to the All Industrials. This despite doubling in price.<\/p>\n \n\tLooking at the forward multiple in earnings per share terms, a figure in excess of 14x<\/span> is justifiable, says Moelis<\/span>, given the substantial growth opportunities by the US and Breville's<\/span> balance sheet strength. Longer term investors should note that BRG<\/span> remains one of Moelis<\/span>' preferred “buy and hold” stocks.<\/p>\n \n\t(*)<\/sup> For the record: When the Sydney Morning Herald asked the FNArena<\/span> Editor to nominate stocks for the year ahead in early 2012, Breville<\/span> was nominated as the number one choice
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