Turkey is an interesting country in that it is often considered to be both part of the Middle East and Europe, as it straddles both regions. The country is an emerging market, and it struggled with an eye-watering inflation rate of 84% in 2022, which has recently dropped to about 54% as of 2023. To put things into perspective, the U.S. experienced a “record high” inflation rate of roughly 9.1% in June 2022, which caused the Fedeal Reserve to slam on the breaks through a hike in interest rates.
The U.S. prefers to keep inflation low primarily because it makes life difficult for businesses. Surprisingly, the Turkish Central Bank took a different approach and lowered interest rates. This caused the stock market to go on a solid bull run, making it the best-performing in the world. After all, soaring inflation does benefit the value of assets that can maintain their demand and raise prices accordingly. The iShares MSCI Turkey ETF (TUR, Financial) reported gains of a staggering 106% in 2022, whereas the S&P 500 ETF (SPY, Financial) in the U.S. was down around 19% for the full year.
As an emerging market, Turkey's risk is high, but so is its reward potential. Thus, let's take a look at three of my favorite Turkish stocks which could offer diversification.
Coca-Cola Icecek
Coca-Cola Icecek AS (IST:CCOLA, Financial) is a Turkey-based Coca-Cola bottling plant that supplies products to Turkey, the Middle East and emerging countries such as Pakistan and Afghanistan.
Warren Buffett (Trades, Portfolio) has been a major fan of Coca-Cola’s strong brand, and the Coca-Cola Co. (KO, Financial) is fourth-largest holding in Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) portfolio. Coca-Cola Icecek is a different business model entirely as it is one of the companies that actually produces the beverages rather than just raking in licensing fees, but it still benefits from the strong brand. In addition, industry trends in the West are moving towards more healthy drink and snack alternatives. However, in emerging economies where Icecek supplies, there are not really concerns over being "healthy," so soft drinks have a huge growth opportunity.
This Coca-Cola plant also supplies a range of other brands such as Fanta, Sprite, Monster (MNST, Financial) Energy and Powerade. Altogether, these drinks make up appromixately 81% of sales, including the classic Coca-Cola brand. In addition, 11% of its sales come from bottled water and the remainder from still juices such as Cappy Orange. The company’s strategy is to continue its expansion into emerging markets, while also keeping capital expenditures low at around 4.6% of sales.
The business also has commodity hedges in place to account for fluctuating costs in its raw materials such as aluminum for its cans and sugar. Therefore, investors can likely expect stable and growing revenue.
Growing financials
The company had previously generated a solid 18% annual revenue growth rate between 2005 and 2020. Then in 2021, this accelerated to a 51% growth rate. For 2022, the company reported a staggering 81% increase in its revenue to $2.89 billion.
Note: Charts are in Turkish Lira.
Its sparkling products are number one in Turkey with a 66% market share, and Turkey-based sales contribute to 43% of its total. About 19% of its sales are derived from Pakistan and 23% from other emerging countries such as Kazakhstan.
In terms of profitability, the company reported operating income of $438.4 million, which increased by 86% year over year.
The business pays a 1.36% forward dividend yield, which looks to be increasing. The company has a strong balance sheet with $750 million in cash and cash equivalents, $304 million in short-term debt and $787 million in long-term debt. Moody’s (MCO, Financial) rates the company B1.
Valuation
In terms of valuation, the stock trades at a price-earnings ratio of 12.87, which is cheap relative to the industry.
The GF Value chart indicates the stock is “modestly undervalued” with a fair value of 298.65 lira at the time of writing.
Reysas
Reysas Tasimacilik ve Lojistik Ticares AS (IST:RYSAS, Financial) is a Turkish logistics company that specializes in warehousing, customs and transportation of goods. Its customers include reputable businesses such as Ford (F, Financial).
I previously covered this company in 2021 on my YouTube channel, Motivation 2 Invest, following an interview with guru investor Mohnish Pabrai (Trades, Portfolio), who stated he was a large shareholder, owning approximately “one-third” of the company at the time. Given this is a Turkish stock, details of the holding are not reported to the SEC and financials can be scarce, so we can only take Pabrai's word for it.
Either way, since that point, its share price has increased by a staggering 567%. Of course, this does include lira inflation, but in U.S. dollars the return is still closer to 300%, which is fantastic.
The whole premise of Pabrai’s investment thesis was that the business had already invested in capital expenditures, having built its vast network of warehouses that covered more than12 million square feet. Therefore, inflation of the Turkish lira did not impact the company and, in fact, acted as a barrier of entry for competitors, as it would cost them more to build a similar facility.
Pabai also said he had visited the facilities and analyzed the management. The company is run by a father and son team, who are “smart operators” and have a long-term outlook regarding the success of the business.
Solid financials
Reysas is more of an asset value play with an estimated asset value of around $1 billion, according to Pabrai. However, the company has also produced steady financial results. The business reported $104 million in revenue for full-year 2022. This was up from the $75 million reported in 2021, but down from $113 million in 2019.
A positive is its profitability, or net income, has improved substantially from a $3 million loss in 2020 and a $4 million loss in 2021 to $12 million in profit generated for 2022.
The business also has a return on invested capital equal to 18.43, which is fantastic.
Valuation
In terms of valuation, the company is fairly challenging to analyze. It has an earnings yield of 11.83% and a PEG ratio of 0.56, which is fairly cheap. However, as mentioned earlier, it is more of an asset play.
Turkish Airlines
The third Turkish stock on my list is Turkish Airlines (IST:THYAO, Financial), or Turk Hava Yollari AO as it is known in Turkey. Turkish Airlines serves 329 destinations across 127 countries worldwide. Its most popular routes include Istanbul to London, New York, Amsterdam, Dubai, Bangkok and many more. In addition, Turkey’s strategic location in the heart of the Middle East and Europe makes it an ideal spot for transfers.
Turkey has become a popular destination for travelers from both Europe and around the world. In the U.K. and Germany, many tourists see Turkey as an alternative vacation destination to Spain or Greece. In addition, the country has become known for its low-cost cosmetic surgery.
Rebounding financials
Despite the challenges of 2020 for airlines as a whole, Turkish Airlines has bounced back strongly. The company reported $16.7 billion in revenue for full fiscal 2022, which increased by a staggering 131% year over year. Its gross margin also expanded from 22.74% in 2021 to 24.31% in 2022, while its operating margin rose from 14.95% to 16.57%.
Turkish Airlines also has a strong balance sheet with about $4 billion in cash and cash equivalents. It aslo has short-term debt of $2.2 billion, which is manageable.
Valuation
The company trades with a price-earnings ratio of 4 and a price-sales ratio of 0.65, which are both cheaper than historic levels.
Final thoughts
Turkey is strategically located in a unique part of the world and acts as a gateway to growth in emerging markets. There are risks given the country’s galloping inflation (greater than 50%) and its changing political system.
By investing in reputable companies that have already spent on capital expenditures, however, the potential for investment gains and diversification is possible due to the low valuations in the country relative to the rest of the world.
