Bhavan Suri, Partner and Co-Group Head at William Blair & Company, says Salesforce.com, Inc. offers the most compelling opportunity for investors to get into the cloud computing space, as the company could deliver 20%-plus growth over the next couple of years.
Salesforce is a roughly $10 billion business growing probably in the mid-20% range when all is said and done. And that is an incredibly healthy growth rate with nice margin expansion, growing free cash flow very, very nicely.
What we see there is a large available market where the leading provider continues to take share from the legacy vendors with multiple products to drive growth. So not just in sales cloud, but also with service cloud, which has been doing very well, and the marketing cloud — now augmented by e-commerce with the Dware purchase — and the Force.com platform.
Coupled with artificial intelligence and analytics, we believe Salesforce.com could deliver sustainable 20%-plus growth over the next couple of years along with margin expansion. I think that’s rarified air, and so certainly one we think investors could get involved in. Even at these multiples, which for Salesforce at 23 times 2018 free cash flow, it’s very reasonable given FCF growth of close to 30%. So that’s one certainly that I think looks very interesting from a large-cap perspective.
In the interview with the Wall Street Transcript, CEO Dick Boer emphasizes growth in online sales and cash flow as key investment critieria:
“As I mentioned already, Peapod in the U.S., but also with ah.nl in the Netherlands with our home delivery, and with bol.com, which is a small but very competitive business model here in the Netherlands and Belgium. We are already driving more than 2 billion euros of our more than 62 billion euros in online sales, and that’s amazing performance for the company which of course has a longstanding heritage in physical stores.”
The growth in free cash flow is impressive:
“If you look at what we expect to deliver this year, we will invest 1.8 billion euros in capex, but at the same time we will have 1.6 billion of free cash flow.”
Read the rest of the interview at The Wall Street Transcript.
Portfolio Manager Jim Golan of William Blair & Company says Home Depot Inc (NYSE:HD) will benefit from an acceleration in new home construction, and that the company also has an opportunity to gain market share from weaker retailers.
We purchased the company several years ago, coming off of the housing bust of 2008/2009, when we viewed it as a fallen growth company. We thought the market at that time had an overly negative view of the ultimate earnings power of Home Depot.
Single-family construction, which is a major thing people look at, was down significantly, and home improvement spending on existing homes was also down fairly significantly because home values were down. If we get some reversion to the mean, Home Depot could potentially benefit at some point down the road. That has occurred over the past several years as single-family home construction has accelerated, home prices have improved, and people are spending money again.
The other thing we found interesting was the opportunity to gain market share from weaker retailers, most notably Sears (NASDAQ:SHLD), which has been struggling for the past several years, particularly in the home-appliance side, and that created an opportunity for Home Depot to take share, which they have been doing successfully. We still believe that we are below prior peak levels in terms of new home construction and also in terms of overall spending on existing homes. We think the outlook is actually fairly positive for Home Depot as we move forward.
What gives us more confidence is job growth and wages are priorities for the new administration. Jobs and growing wages are really important drivers for Home Depot. If people have jobs and their wages are growing, they are most likely going to spend money on their homes. If they do that, that’s going to help Home Depot in terms of their topline revenue growth.
We still see some opportunities to improve overall operating margins, and Home Depot throws off a lot of cash, which means they can increase the dividend and buy back stock. We have a company here in a potentially strengthening economic environment that can grow earnings over the next few years and selling at slight premium to the market on a p/e basis. We still think Home Depot has a long runway of growth and remains a fairly significant holding within our portfolio.
Full interview available here.
Portfolio Manager Jim Golan of William Blair & Company says Union Pacific Corporation (NYSE:UNP) is well-positioned to benefit from improving freight volumes in 2017 as well as the growth of the Gulf Coast petrochemical industry.
What makes this stock interesting today is that we expect freight volumes to improve fairly significantly in 2017. They were negatively impacted with the drop in oil prices back in late 2014 and 2015 because part of their traffic is hauling crude by rail and then also hauling sand, which is used for the production of shale oil.
When the price of oil fell, that really hit their business hard, and they were also negatively impacted by the coal industry, primarily because of warmer winters and the reduced demand for coal, along with some of the regulations that impacted the coal industry. It’s our expectation that coal volumes will start to pick up, particularly during February and onward. Union Pacific should have very easy comps going forward.
We are also going to see some major improvement on the energy side this year, so that should help volumes. The company will also benefit if industrial activity in the United States picks up, which has been at low levels for many years. All these factors should help Union Pacific’s volumes and earnings over the course of 2017 and 2018.
But what’s really interesting we think — on a longer-term basis — is that they are going to be a major beneficiary of the growth of the Gulf Coast petrochemical industry driven by cheap natural gas that we have here in the U.S. Our petrochemical industry will continue to see pretty significant growth over the next few years, and Union Pacific, as I mentioned earlier, services the Gulf Coast, and so they will be a major beneficiary of that growth.
Full interview available here.
Peter Havens says his firm invests all over the world in actively traded securities. It is essentially an equity shop with some fixed income, and a client base of high-net-worth families and individuals. Mr. Havens says his client base is very disposed to the lowering of tax rates. It would allow them to assume a higher risk profile to do things which would be more equity oriented. Mr. Havens shares several companies he finds interesting in the current environment.
Full interview available here.
Benjamin Halliburton says his firm is an equity-focused one that selects quality companies with above-average growth, and buys those companies at a reasonable price. It is a long-term investment philosophy identifying companies with above-average financial characteristics. Mr. Halliburton says those characteristics are driven by qualitative fundamental attributes of the business.
Full interview available here.
Doug Greiner discusses Wilbanks, Smith & Thomas Asset Management, LLC. Mr. Greiner creates customized portfolios that are tailored to a client’s long-term objectives. He works across multiple asset classes, integrating ETFs, bond funds, and individual stocks and bonds into portfolios. Mr. Greiner’s investment philosophy is based on diversification, dynamism and discipline. Through this philosophy, Mr. Greiner is able to deliver returns with reduced risk and have the courage to follow his convictions. It also encourages expertise and active learning to assist in making informed investment decisions.
Full interview available here.
Portfolio Manager Doug Greiner of Wilbanks, Smith & Thomas Asset Management says Berkshire Hathaway Inc. (NYSE:BRK.A) is shifting to more of an operating business, which is bringing in strong growth prospects such as Precision Castparts.
Berkshire is becoming less of an insurance-driven business model and more of an operating business. The noninsurance business did $3 billion of operating income in 2004 versus $25 billion in 2015, an increase from 41% to 75% of total operating income. We welcome this shift for the additional growth prospects it brings.
In particular, we are excited about the prospects for Precision Castparts. Precision Castparts is the world leader in structural investment castings, forged components and airfoil castings for aircraft engines and industrial gas turbines. Airbus (EPA:AIR), Boeing (NYSE:BA), GE (NYSE:GE), Rolls-Royce (LON:RR) and many other leading manufacturers depend on Precision Castparts for critical airframe, engine, power generation, medical and general industrial components. With few exceptions, every aircraft in the sky flies with parts made by Precision Castparts.
Precision Castparts has achieved solid top-line and bottom-line growth, not only through its legacy operations but also through acquisition of businesses specifically targeted to complement those operations. Fiscal 2015 included the contribution of seven businesses acquired after the beginning of fiscal 2014 and two businesses acquired in fiscal 2015. Fiscal 2013 was busier than fiscal 2014 in terms of the number of acquisitions.
The acquisition strategy is not a free-for-all. Management is a very disciplined buyer. To date, the company’s acquisitions have been immediately accretive to earnings with post-acquisition synergies generating increased shareholder value. The acquisition story is not over. The company is communicating no shortage of acquisition candidates for continued growth in the years ahead.
Full interview available here.
Peter E. Grassi discusses Grassi Investment Management, LLC. On the equity side, Mr. Grassi invests in large caps. On the fixed income side, he invests in individual taxable and tax-free bonds. Mr. Grassi mostly deals with high net worth individuals. His goal is to preserve capital and use conservative means to grow it. Mr. Grassi believes interest rates will increase over the next two to five years. With this increase, he sees opportunities in financials, industrials, materials and some energy. Within financials, Mr. Grassi feels money-centered banks and brokerage firms are especially positioned to benefit.
Full interview available here.
Denise M. Farkas discusses Sigma Investment Counselors. The firm manages money for high net worth individuals. Ms. Farkas aims to be well-diversified among and between asset classes. She thinks it’s important to help her clients design an investment plan and stick to it. Ms. Farkas believes this will help investors stay the course and not respond emotionally. In addition, Ms. Farkas advises that investors should have a sense of their risk capacity and risk tolerance. She describes risk capacity as an investor’s ability to take on risk and risk tolerance as an investor’s ability to sleep at night.
Full interview available here.
