3 stocks with global ambitions

-- | 03/10/2019

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Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Tim Woodhouse. He's Manager of the JPMorgan Global Growth & Income Trust.

Hello.

Tim Woodhouse: Hello.

Black: So, we're talking about three stocks in the portfolio that you're quite excited about at the moment. Where would you like to start?

Woodhouse: I think a good place to start is here in the UK, but not domestic UK. It's listed here, but Diageo is just a wonderful example of a UK company that's got some wonderful growth opportunities. So, they have an excellent business in the U.S. where about 50% of revenues are generated. And they've done a really impressive job over the past couple of years of changing the portfolio of premiumising of really bringing the profile of the brands that they push to us as consumers into a more impressive place. And I think a great example of that is the purchase of Casamigos, which is well known for being George Clooney's tequila brand. And it's not just Clooney I think that they were drawn to, although he is around for 10 years to help with the marketing which can't hurt.

But it's the ability to take a brand which is quite niche, and really drive it to a whole another level. And we've seen that they paid 1 billion pounds for it, which – it's a reasonable price. But at the time it was growing at 100 per cent, they've managed to sustain that growth over the past couple of years to be still 50 to 60 per cent. You've seen examples of companies do these kinds of acquisitions, and by these brands, which they think they can do that with and quite often they can fail. So, I think Diageo deserves some credit here. And really, what we attribute that to is the agility of the management's showing their ability to understand trends, understand what the consumer wants, and where they're heading. And that's an important characteristic in any company. And so, this profile has allowed them to grow revenues at 5 per cent, to expand margins, to generate a lot of cash. And those are all things we love to see.

Black: And an example of why people shouldn't be terrified of UK stocks at the moment.

Woodhouse: Well, exactly. You got to remember, the UK has really wonderful exposure to growth all over the world. And so, people shouldn't be scared of the UK just – shouldn't be scared of UK names just because it has a UK listing.

Black: So, this is a global trust, where in the world are we going next?

Woodhouse: Well, in the world, we'll stay in Europe to start with. But another good example, I think, of a company which operates far beyond just Europe and that's Schneider Electric. So, what we really love this company is they are absolutely key to everything we're going to see in the next few years around industrial automation and energy management. So, these are their two big divisions. Energy management, if you think about the world we're going to live in in 20 years' time, if we all have electric cars, well, we're going to need somewhere to charge them. Will be at home; will that be at petrol stations on the motorway? It'll probably be both. But the grid right now can't support that volume of electricity.

Even if we were doing it all at different times, which of course isn't going to happen, we're going to charge our cars at night, the grid still needs upgrading, they still need to bring in the solutions which ensure that it can handle that volume of demand. So, they are a key to that, and they are key to the industrial automation side of factories where we are naturally going to see that increase. We've seen it a lot in China, a lot in the US and in Japan. And Schneider is doing a wonderful job of growing very strongly. We've seen this in recent quarters, just the outperformance versus their peers is notable. Even in Q2, which is a difficult quarter, China have had some well documented problems, Schneider still grew their energy management business at 5 per cent. It's very impressive. And we think that they've positioned themselves very well for the future.

Black: Super. So, what is stock number three?

Woodhouse: Stock number three, I thought I'd take you to the US since I'm based there, and it's got some wonderful opportunities too and an area that's slightly controversial, which is healthcare. So, we're going into election season already. It doesn't seem like it was that long ago since we were in the last one. The healthcare is always a topic. We've heard Bernie come out and talk about Medicare for all, which has its challenges, I think it's fair to say, and also lacks support even from the democrats because it would be unbelievably expensive and it would be at the expense of any kind of commercial insurance.

Cigna is a commercial insurer. They work in the commercial space, but also in the Medicare space. Medicare is growing very strongly. It's helping people who are aging, and you've got Medicaid as well, which helps people who don't have a have a lot of money. And they're both programs, which we think actually have a lot of potential to help solve the uninsured problem in the US Bernie's solution would cut out all private insurers. We think that's part of the solution, not the problem. So, whilst you're likely to hear a lot of noise in the next year around this, we think that what Cigna offers, firstly, is a resilient business model where they're part of the solution; secondly, their acquisition of Express Scripts gives them a much more holistic offering, but it gives them a lot of synergies. They've guided US$600 million of synergies from that deal. We think they can probably double that. So, they've been quite conservative on their guidance. And their guidance for 2021 says US$20 to US$21 in earnings per share. We feel pretty good that they can hit that. And as a result, with the stock on 8.5 times earnings, we think it's a very compelling proposition here.

Black: Well, thank you so much for your time.

Woodhouse: Thank you very much.

Black: And thanks for joining us.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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