In constant FX the growth is still evident, which is key as the market seems prepared to look through the FX volatility to the underlying drivers of the business – something we expected in our Year Ahead. Having ABI and NESN make all time highs (and to little fanfare) is an endorsement of such and we suspect more names in the basket to follow this pattern in time. These are vanishingly rare companies that combine global distribution with incomparable brand equity, pricing power and rising margins who continue to deliver genuine market beating growth consistently across the cycle. The fact many trade below trend offers real value for the longer-term investor. To this end the comments in the FT regarding the shift in focus for one of the biggest sovereign wealth funds in the world is relevant:
More will follow….
As we have been discussing for many years, “exceptional companies deserve exceptional valuations” and as Jeremy Siegel’s masterly analysis of the Nifty Fifty shows, that selection of “great companies” commanded multiples over 40x and peaked at 2x the market multiple. Our HQGB in contrast is on 16x and only slightly over 1.2x the market multiple, and we see the environment very similar then, as now.
Some observations from today:
Reckitt
Reported in-line numbers this morning, the key metric of LFL growth ex-pharma was +4% as expected by consensus. The blowout result was in the Healthcare division, +11% which is tremendous. Management is guiding for flat to moderate EBIT margin expansion (cons is flat YoY). Other FY growth targets (net revenue growth of +4% to +5%) have been reiterated after a robust start. Interestingly, management is saying a capital market solution is a “strong option” for the Pharma business – we have seen how the market reacts to spinoffs of non-core units (witness another HQGB stock GEA Group today, selling the Heat Exchange business, stock +6%).
GEA Group
Finally managed to divest this business unit, c.23% sales. Was a lower margin business (10% EBITDA margins, group is 15%), selling for 8x trailing EBITDA (group on 10x). Will use cash for targeted acquisitions (have “attractive pipeline”), price was expected to be above €1bn. GEA is a HQGB stock, -11% in the last 2 weeks. This will help it recover. Stay long.
Hargreaves Lansdown, 200dma has been long-term support.
Now that the markets seems to have recalibrated for Brazil risks, Experian may regain some favour. It has been one of the three worst performing stocks vs. the HQGB over the past 12 months and has never been this low vs. the basket since its first inclusion in 2011. See below.
Roche - keep adding ahead of ASCO
Danone
Q1 organic growth in-line, Total sales miss due to FX. Total Q1 organic growth +2.2% vs. +2.2% est., Q1 rev €5.06bn vs. 5.15bn est, says Q1 total sales impacted 8.9% by adverse FX. Q1 volume down 1.9% vs. -0.1% est.
Outlook confirms FY 2014 targets, sees FY sales growth 4.5-5.5%.
Seeing upgrades today. See our comments yesterday:
“During the recent selection process for the HQGB 5 (released last week), Sports Direct easily met all the selection criteria, except for one, the valuation cut-off of a 5% FCF yield on Y2 consensus forecasts. With a -20% move in just over a week, Sports Direct now trades on a 5.1% FCF yield and would be eligible (although the HQGB 6 will be out in 12 months time). In terms of the other key criteria for HQG selection, there’s certainly no doubting the stunning margin progression (from 6% operating margins to close to 10% in a straight line), the strong sales growth (consensus sees 7% in Y2). Also the return of capital profile is superb, in the 20% range and expected to climb. With this kind of ROIC and the growth opportunity in Europe ahead, the business is a super-compounder, exactly the kind of business to own in a low growth world.
So the key question here is, post the -20% move, has anything fundamentally changed apart from the price and Mike Ashley owing less shares. It doesn’t appear to be the case. The bonus package for Mr Ashley was voted down and the management targets look to be well ahead of consensus. Mr Ashley’s shareholding is always a potential overhang risk, but in our eyes, the quality of the business and size of the opportunity are still large – this trumps the overhang risk given the valuation here now, 5% FCF yield and 15.5x PE (ex cash) Y2. There are not many high return structural growers in the world that trade on this valuation.
This is a great buying opportunity”.
