Thanks to Backus’ lack of an investor relations team, its absence from passive index funds, and its Spanish-only reporting, no sell-side analysts publish research on the company. Backus is a hidden gem that has the deepest moat of any business we own — as reflected in its 99% market share in Peru. When we met with a potential competitor in South America in October, its investor relations team told us that they considered it “impossible” to compete with Backus in Peru. Our October in-market site visits in Lima reinforced our understanding of the company’s competitive position and the dominance of Backus offerings at the point-of-sale. Both revenue and profit grew in excess of 10% during the first half of the year, with a mid-year excise tax increase drying up this growth in the third quarter (Backus excise taxes paid per unit volume increased by around 33%). This incremental tax will probably limit Backus revenue growth to the low-single digits for a few quarters. Over the longer term, we do expect the company to grow revenues at mid- to high-single digits thanks to premiumization opportunities (price-mix improvements) and consumers who have increasing amounts of disposable income (volume growth).
The stock is more expensive than when we first built our stake in 2018 at a compelling mid-teen price-to-earnings multiple, but we remain comfortable with the position’s size. Our downside is well-protected by the company’s entrenched competitive position, the recession-resistant nature of beer, Backus’ net cash balance sheet, and the company’s capital allocation policy of paying out a majority of its free cash flow in dividends to help its parent company service debt. We hope to be long-term owners of this wonderful business.