[Verisk Analytics] was actually founded by its customers, much like MasterCard (NYSE:MA) and Visa (NYSE:V). In 1971, all the large insurance companies got together to found this company. And therefore, it has data on insurance risk and policy underwriting success, data going all the way back to 1971 that it now sells to its customers, which are almost all of the insurance providers and many financial institutions.
Verisk has four pillars to its success: its proprietary data that we just talked about; deep domain expertise in whatever industry it serves, whether it’s insurance or energy or health care, where it also operates; first-mover advantage, developing new analytical methods and being the first to perfect them; and then, it’s deeply embedded in its customer workflow so that it becomes an integral part of how a customer analyzes its risk.
The company has been able to grow smartly since it went public. And even in 2008 and 2009, it was able to put through price increases, and that shows it’s really a key to how its customers operate. It has about 75% of its revenues on a renewal basis. It just keeps getting renewed again and again, with retention rates topping 98%. So that’s the type of company we like to look for, a company with naturally recurring revenue or subscription revenue and high retention.
Eric Fuhrman, Portfolio Manager at HGK Asset Management, says investors never dove into B/E Aerospace Inc (NASDAQ:BEAV) because of worries about low oil prices. However, since he has purchased the stock, BEAV is up 23% and has a solid competitive position.
When oil prices fell, investors became worried about BEAV’s backlog because there is less of a need to have more fuel-efficient planes in the face of low oil. A lot of BEAV’s backlog is interior components for these lighter, more fuel-efficient models.
But what the market missed is that this is a company that’s an industry leader. They have a very attractive competitive position, and they operate in an industry with a strong long-term outlook and backlog and good visibility. In the very short term, through 2017 or so, there aren’t large growth prospects, but we are being more than compensated by their current cash generation.
In the meantime, they are improving their competitive position, with a greater share of the market and a lower cost structure; this is the part that makes for a great investment. The aircraft-component market is becoming more and more integrated and complicated, and BEAV’s coordination capabilities are a key source of competitive advantage.
We’re also seeing a major competitor falter lately, which BEAV has the opportunity to capitalize on. They also have an opportunity to grow content per plane, as plane interiors become more complex. Aircraft manufacturers want to do business with large suppliers that can make systems work together, and this is where BEAV is competitively advantaged. We have a high level of conviction in this name.
Senior Research Analyst Joel Tiss of BMO Capital Markets says his research on Caterpillar Inc. (NYSE:CAT) led him to downgrade the stock, even as the company claims it’s maintaining its full-year guidance.
I had done some in-depth research including reading through the 10-K, and did a bunch of background work because they announced that they were going to miss their first-year quarter by quite a bit, but that they were maintaining their full-year guidance. As I was doing the research, I noticed that for the last three or four years, they had consistently come in below their revenue guidance, but managed to make their EPS guidance.
So I looked a little bit deeper into what was the driver of that, and I found a whole list of special factors that are largely unrepeatable. For example, they lowered incentive compensation for employees, had an FX gain, and they lowered their warranty expenses.
There is a whole list of similar special circumstances and things they did in my note on the subject, but the bottom line is a lot of those are one-time in nature that you can’t do again. Caterpillar, like a lot of my companies, is pushing the story that they are more resilient to this down cycle than their competitors, saying they have made changes and improvements, and that they are less cyclical and less vulnerable so they should get a higher valuation.
It is certainly true that the companies have done a ton of work to drive operating efficiencies, and they have improved the profitability and the metrics and other things. I’m not trying to take any of that away from them, but I think underneath it all, these are still very cyclical companies, and there is only so much you can do when you are not getting the orders.
So in the case of Caterpillar, my downgrade was a reflection of my research, which makes us question whether they will be able to meet that full-year guidance based on where they are now and what they reasonably will be able to do to get to those numbers.
They operate 4,500 auto part stores, and they’re adding about 200 stores per year. They expect to add 210 this year. And the company is just exceptionally well-run and has a lot of demographics working in its favor: more cars on the road, record number of cars are being sold. Unemployment is going down, which of course means more people are driving. A lower price of gas leads to more miles being driven as well.
The company has just been really about phenomenal operation by management. For seven straight years, earnings per share have grown 20% or higher per year with 28 straight quarters of earnings per share growth above 20%. Same-store sales grew more than 7% every quarter last year in 2015.
So what’s happening is customer loyalty is very strong, and the company still has a lot of room to expand in the Northeast as well as other parts of the country, so they continue to look at acquisition targets as well. They grew earnings per share 25% last year, and they should grow earnings per share 16% to 20% this year. The stock trades in kind of a mid-20s value multiple on most metrics, but I think that premium is worth it.
Fischer says O’Reilly is also a good example of how a company employs new technology to its benefit.
One of the reasons they’re so profitable and growing so strongly is they invested early in data and information, and that helps them have the right auto part at the right time at the right place for people, and that’s a big convenience. When your car breaks down and you need a part, you’re going to get it from whoever can get it to you quickest. So companies that know how to harness the power of technology and use it to their advantage are certainly something that we look for.
It’s one of the companies in the processing subsector […] and in particular it has a greater focus on large financial institutions, international financial institutions relative to its peers. So that’s its differentiation.
We like FIS because we think it’s a good value after the multiple compressed in 2015 due to some underperformance in revenue in the big bank spending segment of its business…While the variability in this big bank services rev occurred, we think it has stabilized, and we think the expectations that FIS has set for 2016 are reasonable.
If and when they achieve those expectations, which we think they will, we think the market will regain some of the confidence in the predictability of that business and we think the multiple will benefit from that. We also think a recent acquisition they did called SunGard will yield some compelling medium-term rev and cost synergies.
Managing Director Leslie Tubbs of Zevenbergen Capital Investments looks for high-growth companies that are disruptive in their industry, and she says Regeneron Pharmaceuticals Inc (NASDAQ:REGN) is an example of an innovative company on the biotech side.
This company is completely dedicated to internal development of drugs, so they don’t typically go out and license products. They have a therapy on the market called EYLEA for macular degeneration and several other eye diseases. Regeneron is using the capital generated from the sale of EYLEA to develop other drugs.
They are owned in part by Sanofi (NYSE:SNY), which has helped with the development cost of Regeneron’s product pipeline. Regeneron has a very interesting pipeline, including dupilumab, which they’re exploring for the treatment of atopic dermatitis and asthma. As we consider new health care additions to our portfolio we’re looking for strong revenue growth, so these companies will most often already have a commercial product on the market and an active development pipeline to help sustain growth in the future.
Tubbs’ firm has a philosophy that is predicated on a belief that earnings, revenue and cash flow drive stock price appreciation, and it targets companies that typically exhibit growth in excess of 15%.
The types of growth companies we’re targeting can be leaders in their industries or they can be forging a new industry such as many of the innovative companies we see today. Identifying companies creating disruption in an industry has been a driving factor in our stock selection process since inception.
Leslie Tubbs, Managing Director and Portfolio Manager at Zevenbergen Capital Investments, says Celgene Corporation (NASDAQ:CELG) has built a platform of innovation that started with the success of its product REVLIMID.
This company has been a leader in developing treatments for blood cancers. Celgene has had great success over the years with a product called REVLIMID, which is a treatment for multiple myeloma. The company saw growth from the initial product introduction, uptake by a growing number of patients and more recently from increased treatment duration driven by better patient outcomes.
They also have an active business development program which allows investment beyond their internal research, accessing new, innovative technologies in drug discovery. By doing so, Celgene is creating a platform of innovation where they can participate in the upside of these new technologies, without taking on all the downside risk in development of new drugs. This marriage of internal and external product development builds on the success of REVLIMID and expands opportunities in the coming years.
I’m generally looking for banks that have a good loan growth story and have more of a mix of lending and capital markets activities, or a mix of wealth management and capital markets activities such as in the case of Morgan Stanley, where traditionally it’s been more institutionally focused and capital-market-sensitive. But it now has a very strong wealth management piece that they’re looking to grow, and that adds some stability to the overall business mix.
Bigger says his “buy”-rated companies are strong in several areas and have a range of businesses that over time can show growth across segments and geographies.
Morgan Stanley obviously has an enormous wealth management network, with a large number of advisers in place. That’s been a reasonably stable base of business, and looking at the balance of the business, they tend to rank well in IPOs and merger and acquisition activity and some other capital-market-sensitive business lines. It’s the wealth management piece that gives them that optimal business mix that you’re looking for.
Rob Rutschow, Lead Analyst at CLSA Americas, says the trend toward passive investing is having an impact in the asset management space, and for firms like BlackRock, Inc. (NYSE:BLK) that have large ETF businesses, this has led to growth.
Our view is that BlackRock is unique among the investment managers, given that nearly one-third of their revenue and perhaps more of earnings come from ETFs. That’s the highest growth segment within asset management. The asset managers tend to be high-beta, meaning that when markets go down, the asset managers will go down more, but that when markets go up, they tend to go up more.
There are few areas in finance services that have really good organic growth prospects. ETFs are one of the areas. There are projections that ETF assets globally could double over the next five years. If that was to occur, then BlackRock might see half of their earnings coming from the ETF business. Ultimately ETFs could match or exceed the size of the mutual fund business, given the tax advantage they enjoy.
We feel that Blackrock has a good business mix, and if anything, we would like to see them have more ETF exposure. But given that they have about one-third of the market share they are in a pretty optimal position.
Senior Vice President Jeff Jorgensen of Center Coast Capital Advisors says Enterprise Products Partners L.P. (NYSE:EPD) is a best-in-business MLP that ticks all the boxes on how to run a company through commodity cycles.
[Enterprise Product Partners] has a simplified structure with no general partner, which gives it a nice equity cost of capital. It’s investment-grade. It has the liquidity and the access to the capital markets to manage its growth, which it has kept consistent and modest, even when coverage ratios expanded for them tremendously.
It’s run by one of the higher-quality management teams. And its diversified footprint gives it the commercial strength to win projects, to participate in M&A, and to really offer E&P or demand-facing customers a full suite of midstream products. So Enterprise Product Partners would be one of those large-cap diversifieds that we think is a really great MLP.