What $6,400 Toilets Say About China Consumers

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Charles Sizemore, InvestorPlace.com

ROCKVILLE, MD ( InvestorPlace) -- Kohler, the American plumbing fixtures manufacturer, now sells the $6,400 Numi luxury toilet in emerging markets like China. Driven by the demanding tastes of China's newly wealthy, the Numi features a heated footrest and a "sleek iTouch style remote," according to the Financial Times. The gadget controls an internal music system, the adjustable bidet and the temperature of the seat.

It also allows the user to play video games, read e-books, and call friends on Skype. Yes, Skype. The press release didn't elaborate on whether Skype's video conferencing features are enabled; I sincerely hope they are not.

This story about a tricked-out toilet is good for a laugh, but it also is a serious example of the potential of emerging markets. Consumers in regions like China have money to burn on consumer and luxury goods, even as Americans are cutting back.

Historically, Western luxury goods firms have sold items to China and other emerging markets that were originally designed for American and European tastes. This is changing. Suffice it to say, Americans are not interested in Skyping each other while sitting on the can. The Numi luxury toilet is a very expensive piece of engineering built by an American company specifically with a Chinese consumer in mind.

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    Separately, the Italian luxury group Prada has decided to go forward with its initial public offering. But rather than list the shares in Milan -- or even London or New York -- Prada has opted for Hong Kong. In floating its shares in Asia rather than its home market, Prada is making a very public statement of where the company sees its future. Investors, take note.

    So how can you profit from China's love affair with luxury? Here are three easy ways:

    The world's largest purveyor of premium spirits, the UK-based Diageo ( DEO), has the No. 1 premium scotch whisky in the world by sales in Johnnie Walker, and the No. 1 premium vodka in Smirnoff. In Tanqueray gin, Bailey's Irish Cream, Jose Cuervo tequila and Guiness Irish stout beer, Diageo also enjoys category leadership.

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    Diageo already gets a third of its revenues from emerging markets, and the company has recently stepped up its already aggressive marketing campaign in China. China is an enormous market for premium spirits, yet it remains almost virgin territory for Diageo's Scotch whisky brands. According to International Wine and Spirits Research Magazine, cognac and the French brandy Armagnac account for 66% of the value of all imported spirits, while Scotch whisky has only a 29% share. And even within the Scotch category, Diageo's Johnny Walker brand trails Pernod Ricard's Chivas Regal. As of 2010, Chivas Regal had a 37.5% share of the whisky market by volume, while Diageo had 27%.

    The bottom line here is that there is plenty of room for growth in China.

    At 17 times earnings, Diageo trades at a premium to the broader market. I'm OK with that. This is a company with returns on equity of nearly 40%, manageable levels of debt, and unbeatable exposure to emerging markets.

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    Next on the list is women's luxury handbag maker Coach ( COH). Coach has been a high-performer in recent years, and it is easy to understand why. The company is an absolute money-minting machine. It enjoys returns you would normally only expect from mafia businesses and yet -- unlike so many high-profile blow-ups of 2008 and 2009 -- Coach did not take on excessive debts to achieve those returns. In fact, the company is net debt free, yet it manages to produce a return on equity of an eye-popping 51%.

    Coach continues to impress. The company recently raised its quarterly dividend by 50% and has authorized the repurchase of 1.3 billion shares.

    Right now sales in China and the rest of the developing world are still quite modest, but they are growing fast. The company expects to have sales of more than $500 million in 2014 in China alone and plans to open roughly 30 new stores per year there from its current base of 52.

    My final recommendation is German luxury automaker Daimler AG ( DDAIF), the maker of the iconic Mercedes Benz. Though it may seem somewhat risky to invest in an auto company, given the still precarious state of the global economy, consider that Daimler's core customer base has weathered the storm quite nicely. Earnings were up by almost 60% last quarter, and the stock trades at a very modest 10 times earnings and 0.5 times sales.

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    Meanwhile, sales volumes to China were up 56% in April over the prior year, and the flagship S-Class sedan saw a stunning 111% increase. China is already Daimler's biggest market for the premium S-Class and the company's third-largest market overall. Not bad indeed.

    With renewed concerns about a European sovereign debt crisis shaking investor confidence, Daimler shares have fallen sharply over the past month. I would view any additional weakness as an excellent buying opportunity.

    Charles Lewis Sizemore, CFA, is editor of the Sizemore Investment Letter.

    This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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