3 Top Picks: Lazard's likes in global equities

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Lex Hall: Hi, I'm Lex Hall. Welcome to the Morningstar series, "3 Top Picks." With me today is Warryn Robertson from Lazard Asset Management's Global Equity Franchise. We're going to talk about global stocks and three of his top picks.

Good day, Warryn.

Warryn Robertson: Good day, Lex. How are you?

Hall: Good. I'm well, thanks. Now, since its inception, your fund, it began in 2013, it's delivered more than 16 per cent versus about 13 per cent for the MSCI World Index. Let's run a few names among your top holdings. The first one today you like is Stericycle. Tell us about Stericycle.

Robertson: Sure. Yeah, it's one of the top holdings in the portfolio today. It's a regulated waste company. So, essentially, it takes medical waste and disposes of it for doctors' surgeries and medical centres. It's going through some teething problems at the moment. It's done an acquisition of a large document storage business called Shred-it and the market has become a little impatient about how the merger integration of that is occurring. We still like the business. We think the Shred-it acquisition is a side show of the core regulated waste business in which they dominate. They have a 20 per cent market share in the United States. It's, we understand, 15 times its nearest competitor. So, the core business of Stericycle is really around mopping up those smaller regulated waste distribution businesses, integrating it into its much greater platform and through its scale generating superior returns for investors. So, we think there's a few little blips in the short to medium term, but as a long-term investment story, we are really very comfortable with it trading on some of the most attractive multiples it has done in decades.

Hall: Okay. Second name on the list is more of a household name, if I could say, it's Anheuser-Busch. What in particular strikes you about this company?

Robertson: Yeah, it's an interesting one. As you say, it's more of a household name. They have 10 of the largest beer brands in the world. They talk about their $10 billion brands that they have. Anheuser-Busch, clearly, the No 1 market player. Unlike Stericycle, which had 15 per cent market share, this business has 50 per cent plus market share in some markets including the United States, South America and Mexico. So, a dominant brand business that through that scale generates superior financial returns.

So, one of the metrics we look at and we like is it's twice the size of its No 2 competitor Heineken and it produces almost twice the EBITDA per hectolitre. So, it produces almost $40 of EBITDA for every 100 litres of product that it sells, whereas Heineken struggles to produce $20. Now, Heineken is a great business, but Anheuser-Busch just happens to be better because of its scale and [it’s] larger. Again, another acquisition, teething problem issue. It acquired SABMiller, which is dominant in Africa and also parts of Europe. That acquisition, again, market becoming impatient, wanting to see results every quarter. We believe that the integration will take three years. We are happy to be patient to wait for that three years and that's what gave us the opportunity to buy into that stock.

Interestingly, Anheuser-Busch is the only consumer staples stock that we own in the strategy. As I mentioned earlier, we look for businesses that are more predictable than the average industrial companies. So, we like businesses with strong economic moats, strong brand presence and high margins, high return on assets, typically the types of businesses that we look at. But we have a very keen valuation focus. So, we like consumer staple businesses; we just don't think they are trading at attractive prices today unlike Anheuser-Busch which is one we do see value in.

Hall: Okay. And the final name on the list is Medtronic.

Robertson: Yeah. Medtronic, again, dominant in its space. It is the 800-pound gorilla of the medical device industry. Across its catheters and cardiac-related devices somewhere between 40 per cent and 50 per cent plus market shares, two to three times its nearest competitor. And what generates its economic moat or the reason it dominates its marketplace is clearly its scale but also its ability to use that scale to invest in R&D. It spends $2 billion a year on refining its patent brands. So, it doesn't have, unlike some pharmaceutical companies that face a patent cliff and then a drug which they've made lots of money out of becomes generic and the economic range disappear, Medtronic because of the way the patents work for devices, is able to continue that superior return on assets, strong earnings growth and it's in a space that the world needs at the moment. The cardiac disease is increasing. It is the No 1 name in addressing that disease and problem and it's a fantastic business trading at reasonably fair valuations today. So, it's a decent holding in the portfolio, too.

Hall: Okay. Warryn, thanks for your insights.

Robertson: Thanks, Lex. Appreciate being here.

Hall: I'm Lex Hall for Morningstar. Thanks for watching.

This report appeared on www.morningstar.com.au 2019 Morningstar Australasia Pty Limited

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