CIO John Dowling of Golub Group says that not only does Mondelez International Inc (NASDAQ:MDLZ) have high global market share and a powerful distribution platform, but the company is also in the midst of a turnaround which should enable MDLZ to grow year after year.
They’ve got tremendous global market share in variety of categories. In biscuits, candy and chocolate they have the highest global market share. They’re second globally in gum and coffee. The brand portfolio is absolutely incredible: Cadbury, Oreo, Toblerone, Chips Ahoy!, Trident, etc.
Aside from the company’s favorable food categories, we also like their distribution platform. It’s a unique, hard-to-replicate asset in that, unlike many package food categories that are sold strictly in supermarkets and grocery stores, snacks are sold in a variety of other locations: convenient stores, vending machines, kiosks and elsewhere. So that distribution platform is an enormously powerful asset and, without the need for refrigeration, the company’s products can be expanded rapidly in emerging markets that don’t have the developed infrastructure.
The company is in the midst of a major turnaround, led initially by Nelson Peltz, who has exited his position, but also by Bill Ackman, who is still involved. Management is doing a number of things to improve margins, which remain well below what we believe are “normalized” levels. They’re discontinuing low-margin products and product categories. They’re realigning their manufacturing footprint by shutting down subscale plants. They’re reducing overhead cost by consolidating back-office shared services, and they’re implementing zero-based budgeting across the organization to control the future growth of cost.
So we really think this business represents a tremendous compounding machine over the long term. This business will continue to grow year after year for the foreseeable future, so we feel pretty happy about our ownership in this.
Co-Portfolio Manager Willem Schilpzand of Alpine Capital Research says Intel Corporation (NASDAQ:INTC) is one of the largest holdings in his portfolio because of the company’s manufacturing lead and sizable intellectual property portfolio.
Intel is an interesting case because we believe it really speaks to our focus on the long-term sustainable-cash-flow-generating power of the company, and having the patience to let corporate results unfold and the share price to eventually reflect this corporate performance.
We…look at Intel as a company that has two very positive things going for it that we believe should allow INTC to continue to be a winner in the semiconductor space in the future. Number one is its manufacturing advantage, and number two is its scale combined with its intellectual property portfolio.
We believe it is fairly well-accepted that Intel has the manufacturing lead. In short, we believe a manufacturing process lead allows Intel to put more transistors on a chip to make its performance faster at equivalent cost versus competitors, or allows INTC to put an equal amount of transistors on a smaller chip footprint and hereby reduce cost and improve power consumption statistics versus competitors.
The second part speaks to INTC’s scale and its intellectual property portfolio. The semiconductor business is very capital-intensive from both a capital expenditure and an R&D perspective. Intel spends approximately $8 billion per year to improve its manufacturing process and keep it ahead of competition, and INTC also spends approximately $12.5 billion per year on R&D. This is greater than $20 billion per year. Not only is this a massive amount, INTC has been making these investments for a very long time and has therefore built up a very sizable intellectual property portfolio.
President and CIO Sean Chaitman of Shelter Rock Management says Anheuser Busch Inbev SA (ADR) (NYSE:BUD) is a common holding in all three of his firm’s strategies and is categorized as what he calls an “acquisition specialist.”
In today’s sluggish global economic environment, companies that can successfully identify and acquire other businesses tend to do well for their shareholders.
[Anheuser Busch Inbev] is the result of a series of successful acquisitions. Its management team is adept at identifying and successfully acquiring other companies. The company is the result of the merger between InBev, which makes Stella Artois and Becks, and Anheuser-Busch, which of course owns the Budweiser brands.
InBev’s management successfully acquired Budweiser in the last decade and then proceeded to acquire Grupo Modelo (OTCMKTS:GPMCF), which owns the Corona brands. Right now, it’s in the process of buying theMiller brands, which we expect to support continued rapid cash flow growth in the years ahead. Basically, their strategy is to acquire companies and streamline the combined businesses. They use the excess cash flow from their merger synergies to pay down debt, increase the dividend and acquire more businesses.
Deena Friedman, Research Analyst at Fidelity Management & Research Company, says Amazon.com, Inc. (NASDAQ:AMZN) is in her top 10 as it continues to be a key disruptor in online and brick-and-mortar retailing.
I just think about the sheer number of people going on Amazon, whether they’re going on to access their Prime membership, to watch videos, to stream videos; that’s drawing a lot of people at Amazon.
Also, it’s really an endless aisle, where you can buy shorts and T-shirts on Amazon in the dead of the winter, whereas if you go into a traditional brick-and-mortar retailer, you can’t. The traditional brick-and-mortar retailers are really constrained by space. Think about really the random things that you can get on Amazon, and the convenience of it all. You don’t have to run out to the mall. You can be at home in your pajamas at midnight ordering on Amazon.
At Fidelity, we have the luxury of taking a long-term investment horizon. Some people might say, “It’s expensive,” but when I look at online stocks, I focus on the long-term outlook. That’s how I think about it.
Amazon is the online retailer behind Prime Day, an internet sales event taking place Wednesday July 12 where the e-commerce company offers products at prices lower than retail price to its Prime members.
Managing Director Derek Deutsch of ClearBridge Investments says Nike Inc (NYSE:NKE) meets his ESG investment criteria in that it is on the forefront of promoting humane working conditions in factories and also has reduced its waste by 50%.
The manufacturing footprint of a company like Nike 10 to 20 years ago is very different than the footprint that they have today. Yes, they were criticized in the past for some of their labor standards and manufacturing conditions, primarily in emerging economies, but they have addressed these issues in a very comprehensive way, and now, they are considered to be on the forefront of promoting humane working conditions in factories around the world. They have joined the Sustainable Apparel Coalition and are the only company that we are aware of to disclose the location of every factory throughout its network.
In addition to that, they are doing lots of other great things from an ESG perspective as well. They are really cutting down on the waste that is generated in manufacturing their products. They have a new technology called Flyknit that uses far less material than a traditional sneaker. Nike, through other technologies that they’ve implemented including laser technology, has further reduced waste by another 50%.
The dyes that they use were once an environmental hazard, and some of the dyes that have been used to dye both sneakers and clothing consume tremendous amounts of water. But they have developed very safe dye technology and now use no water in the process at all. A lot of the materials they use are recyclable. They have local manufacturing throughout the globe, so you don’t have to ship products as far, which greatly reduces the carbon output. They have really done a number of innovative things to make their manufacturing process really the gold standard in retailing from our perspective.
Managing Director Derek Deutsch of ClearBridge Investments says his firm has included Alphabet Inc (NASDAQ:GOOG) in its ESG fund because of the company’s positive impact and sustainability elements.
We believe that Google at its essence is a company that has democratized knowledge. Through its search engine, it makes information easily accessible to anyone that has internet access. First and foremost, we are looking at the product or service that the company provides and whether we think it has a positive impact or not. We think Google clearly meets that test.
Then, we also examine whether the company is managed with sustainability elements imbedded throughout the organization. Google clearly has a sustainable competitive advantage as evidenced by its dominance in search, but it also pays a lot of attention to environmental sustainability. It has been carbon-neutral since 2007. Its data centers use 50% less energy than a typical data center. And it has invested in renewable energy projects around the world.
And then, financially, it has really an incredible business. It has over $70 billion in net cash on the balance sheet, which is about 15% of its market value. It has midteens returns on capital. It generates over $15 billion dollars in free cash flow every year. So it is an incredibly strong company financially, but we think it also does a lot of good things for people and for the environment.
President Robert Burnstine of Fairpointe Capital says his large position in Twenty-First Century Fox Inc (NASDAQ:FOX) is because of the company’s strong assets and margins, as well as its ability to buy back stock.
Twenty-First Century Fox, I think, just has great assets. They’re really in three primary lines of business: cable programming, television and filmed entertainment. And the real core jewels of the business are the cable assets, which generate probably 50% of the revenue and 75% of the cash flow of the company. The company has very good margins.
The assets that they own are things like the Fox network, Fox News cable network, FX, a number of regional sports networks, which I think are very valuable and don’t get accorded near the value that ESPN has but may be more attractive because you’re dealing with local content, and people tend to be very loyal to their local teams.
And they also have some hidden assets. They have a close-to-40% interest in Sky (LON:SKY), which is the European direct broadcast satellite business, which is worth several billion dollars, but they don’t get any credit for that.
The company has good margins. They throw off a lot of free cash flow. They’ve been buying back a lot of their own stock, $6 billion to $7 billion per year, which is 7% or 8% of the company annually.
Anthony Zackery, Associate Portfolio Manager at Zevenbergen Capital Investments, says Tesla Motors Inc (NASDAQ:TSLA) reflects his firm’s philosophy of investing in companies that benefit from technology advancements and are in the early stages of a growth curve.
Tesla is a technology company that happens to fall into the automobile category. They are disrupting a traditional mode of transportation. We believe they have really yet to crack the market. Up to this point, their products have catered to niche, wealthy customers, so we look forward to the production of its Model 3 mass-market vehicle.
They are in growth mode. Underscoring Tesla’s bright roadway, the company received hundreds of thousands of reservations and down payments for its Model 3 vehicle. Time will tell with regard to electric-vehicle adoption, but Tesla is pushing the boundary.
Co-Group Head Nick Heymann of William Blair & Company has an “outperform” rating on General Electric Company (NYSE:GE) on the basis that the company is undergoing what he calls a three-part transformation.
The first is largely now reflected in GE’s share price, and that’s the company’s almost complete exit from their financial service business.
The second is the digitization of the company and the ability to now create a fourth avenue for growth that has never previously existed for industrials: the ability to create value from information. Up to now, industrial companies typically grew from selling their products, from long-term service agreements if they have an installed base, and most recently from software to optimize the performance of their installed base products.
Finally for GE there is a third element, which still has yet to become fully evident, which is the ability of GE to be one of a handful of companies that is able to successfully grow in the last frontier of the global economy: undeveloped economies. These countries’ needs right now are not for finished industrial goods per se, because they don’t have the requisite aftermarket and distribution and service and support, but rather for base infrastructure. The demand is very high, but historically the impediment has been adequate finances to afford the base infrastructure to modernize their economies.
So GE has been working to help coordinate structuring project finance with equity and debt from sovereign wealth funds and insurance companies around the world to really unlock and redirect capital to be able to bring what’s approximately a third of the world’s population into the 21st century.
Joseph DeNardi, Vice President at Stifel, Nicolaus & Co., says his “buy” rating on defense stock Raytheon Company (NYSE:RTN) is because the company’s product portfolio is best aligned with where demand is.
Their products are heavily focused on missiles, missile defense, sensors, electronics, and I think specifically for the missile and missile defense, demand for those in the Middle East is very strong and getting stronger. Raytheon has the biggest international business out of all the defense companies, and a lot of that is in the Middle East.
I think the concern that investors have is: Are lower oil prices going to negatively impact defense spending from some of Raytheon’s international customers at some point? I think the answer to that is, at some point it probably will, but not in the next few years, I don’t think, because Saudi Arabia isn’t going to defer a missile defense program given the uncertainty in that region. So that’s the pitch on Raytheon.
Our high-level view is even though defense stocks are fairly expensive right now relative to where they’ve traded historically, they’re very high-quality. You get what you pay for to some extent. It’s hard for us to come up with a scenario where you see huge outperformance from the industry like you’ve seen over the past couple of years, but we think that the downside risk is relatively low, assuming they continue to execute well and they don’t engage in M&A outside of their core competencies.
