President and CIO Christopher Tsai of Tsai Capital Corporation says McKesson Corporation (NYSE:MCK) stock is down from a high of $240, but the company’s scale and competitive advantage are what keeps him interested from an investment standpoint.
McKesson is based in San Francisco. It’s been headed by John Hammergren since 2001. McKesson is the largest wholesaler of prescription drugs by revenue. The company is also the second-largest specialty pharmaceutical distributor in the United States. It’s about a $41 billion market cap. The stock sells for about $178 a share, and it’s down from a high of about $240. So that’s interesting to us.
So why is it down? It’s down largely because the market is concerned that payers will continue to curb the growth of drug spending, and there will be less of a tailwind from the generic side. But we think that the company’s enormous scale provides significant bargaining power and that these concerns are already reflected in the stock price. The stock is selling for about 12.7 times forward earnings. And this multiple is about 7% below its historical average for a business that continues to grow very well.
McKesson certainly has the kind of competitive advantage that we look for. It should continue to grow EPS at a low-double-digit rate and continue to produce high rates of return on equity and capital. And also, I’d like to note that McKesson produces strong free cash flow, which can be used for a larger share repurchase program or for acquisitions, both of which we have not included in our assumptions and in our EPS estimates, which call for about $14 in earnings per share over the next 12 months.
Managing Director Brooke de Boutray of Zevenbergen Capital Investments says Netflix, Inc. (NASDAQ:NFLX) is expanding on its success internationally, leveraging its content investments into 130 new countries.
You may be familiar with some of their widely watched shows such as “Orange Is the New Black” or “House of Cards.” These are shows that are popular not only with U.S. subscribers but also internationally. And in January, they announced expansion into 130 new countries, essentially everywhere but China. A very large growth opportunity indeed.
Ms. de Boutray adds that while Netflix is experiencing a more competitive environment with services like Amazon Prime, it has been able to leverage costs over a growing subscriber base.
They’re definitely experiencing a more competitive environment when it comes to buying content because one of the other large buyers is Amazon. Amazon Prime Instant Video is part of Prime service. And it’s a way to add value to that $99 subscription, and Prime has become a significant revenue driver for the company. But so far, Netflix has been very successful in acquiring a large, quality library of entertainment, as well as producing original content. Content costs have risen; however, Netflix can leverage those costs over a much larger subscriber base. No one matches Netflix’s scale.
CIO John Dowling of Golub Group says that not only does Mondelez International Inc (NASDAQ:MDLZ) have high global market share and a powerful distribution platform, but the company is also in the midst of a turnaround which should enable MDLZ to grow year after year.
They’ve got tremendous global market share in variety of categories. In biscuits, candy and chocolate they have the highest global market share. They’re second globally in gum and coffee. The brand portfolio is absolutely incredible: Cadbury, Oreo, Toblerone, Chips Ahoy!, Trident, etc.
Aside from the company’s favorable food categories, we also like their distribution platform. It’s a unique, hard-to-replicate asset in that, unlike many package food categories that are sold strictly in supermarkets and grocery stores, snacks are sold in a variety of other locations: convenient stores, vending machines, kiosks and elsewhere. So that distribution platform is an enormously powerful asset and, without the need for refrigeration, the company’s products can be expanded rapidly in emerging markets that don’t have the developed infrastructure.
The company is in the midst of a major turnaround, led initially by Nelson Peltz, who has exited his position, but also by Bill Ackman, who is still involved. Management is doing a number of things to improve margins, which remain well below what we believe are “normalized” levels. They’re discontinuing low-margin products and product categories. They’re realigning their manufacturing footprint by shutting down subscale plants. They’re reducing overhead cost by consolidating back-office shared services, and they’re implementing zero-based budgeting across the organization to control the future growth of cost.
So we really think this business represents a tremendous compounding machine over the long term. This business will continue to grow year after year for the foreseeable future, so we feel pretty happy about our ownership in this.
Co-Portfolio Manager Willem Schilpzand of Alpine Capital Research says Intel Corporation (NASDAQ:INTC) is one of the largest holdings in his portfolio because of the company’s manufacturing lead and sizable intellectual property portfolio.
Intel is an interesting case because we believe it really speaks to our focus on the long-term sustainable-cash-flow-generating power of the company, and having the patience to let corporate results unfold and the share price to eventually reflect this corporate performance.
We…look at Intel as a company that has two very positive things going for it that we believe should allow INTC to continue to be a winner in the semiconductor space in the future. Number one is its manufacturing advantage, and number two is its scale combined with its intellectual property portfolio.
We believe it is fairly well-accepted that Intel has the manufacturing lead. In short, we believe a manufacturing process lead allows Intel to put more transistors on a chip to make its performance faster at equivalent cost versus competitors, or allows INTC to put an equal amount of transistors on a smaller chip footprint and hereby reduce cost and improve power consumption statistics versus competitors.
The second part speaks to INTC’s scale and its intellectual property portfolio. The semiconductor business is very capital-intensive from both a capital expenditure and an R&D perspective. Intel spends approximately $8 billion per year to improve its manufacturing process and keep it ahead of competition, and INTC also spends approximately $12.5 billion per year on R&D. This is greater than $20 billion per year. Not only is this a massive amount, INTC has been making these investments for a very long time and has therefore built up a very sizable intellectual property portfolio.
President and CIO Sean Chaitman of Shelter Rock Management says Anheuser Busch Inbev SA (ADR) (NYSE:BUD) is a common holding in all three of his firm’s strategies and is categorized as what he calls an “acquisition specialist.”
In today’s sluggish global economic environment, companies that can successfully identify and acquire other businesses tend to do well for their shareholders.
[Anheuser Busch Inbev] is the result of a series of successful acquisitions. Its management team is adept at identifying and successfully acquiring other companies. The company is the result of the merger between InBev, which makes Stella Artois and Becks, and Anheuser-Busch, which of course owns the Budweiser brands.
InBev’s management successfully acquired Budweiser in the last decade and then proceeded to acquire Grupo Modelo (OTCMKTS:GPMCF), which owns the Corona brands. Right now, it’s in the process of buying theMiller brands, which we expect to support continued rapid cash flow growth in the years ahead. Basically, their strategy is to acquire companies and streamline the combined businesses. They use the excess cash flow from their merger synergies to pay down debt, increase the dividend and acquire more businesses.
Deena Friedman, Research Analyst at Fidelity Management & Research Company, says Amazon.com, Inc. (NASDAQ:AMZN) is in her top 10 as it continues to be a key disruptor in online and brick-and-mortar retailing.
I just think about the sheer number of people going on Amazon, whether they’re going on to access their Prime membership, to watch videos, to stream videos; that’s drawing a lot of people at Amazon.
Also, it’s really an endless aisle, where you can buy shorts and T-shirts on Amazon in the dead of the winter, whereas if you go into a traditional brick-and-mortar retailer, you can’t. The traditional brick-and-mortar retailers are really constrained by space. Think about really the random things that you can get on Amazon, and the convenience of it all. You don’t have to run out to the mall. You can be at home in your pajamas at midnight ordering on Amazon.
At Fidelity, we have the luxury of taking a long-term investment horizon. Some people might say, “It’s expensive,” but when I look at online stocks, I focus on the long-term outlook. That’s how I think about it.
Amazon is the online retailer behind Prime Day, an internet sales event taking place Wednesday July 12 where the e-commerce company offers products at prices lower than retail price to its Prime members.
Managing Director Derek Deutsch of ClearBridge Investments says Nike Inc (NYSE:NKE) meets his ESG investment criteria in that it is on the forefront of promoting humane working conditions in factories and also has reduced its waste by 50%.
The manufacturing footprint of a company like Nike 10 to 20 years ago is very different than the footprint that they have today. Yes, they were criticized in the past for some of their labor standards and manufacturing conditions, primarily in emerging economies, but they have addressed these issues in a very comprehensive way, and now, they are considered to be on the forefront of promoting humane working conditions in factories around the world. They have joined the Sustainable Apparel Coalition and are the only company that we are aware of to disclose the location of every factory throughout its network.
In addition to that, they are doing lots of other great things from an ESG perspective as well. They are really cutting down on the waste that is generated in manufacturing their products. They have a new technology called Flyknit that uses far less material than a traditional sneaker. Nike, through other technologies that they’ve implemented including laser technology, has further reduced waste by another 50%.
The dyes that they use were once an environmental hazard, and some of the dyes that have been used to dye both sneakers and clothing consume tremendous amounts of water. But they have developed very safe dye technology and now use no water in the process at all. A lot of the materials they use are recyclable. They have local manufacturing throughout the globe, so you don’t have to ship products as far, which greatly reduces the carbon output. They have really done a number of innovative things to make their manufacturing process really the gold standard in retailing from our perspective.
Managing Director Derek Deutsch of ClearBridge Investments says his firm has included Alphabet Inc (NASDAQ:GOOG) in its ESG fund because of the company’s positive impact and sustainability elements.
We believe that Google at its essence is a company that has democratized knowledge. Through its search engine, it makes information easily accessible to anyone that has internet access. First and foremost, we are looking at the product or service that the company provides and whether we think it has a positive impact or not. We think Google clearly meets that test.
Then, we also examine whether the company is managed with sustainability elements imbedded throughout the organization. Google clearly has a sustainable competitive advantage as evidenced by its dominance in search, but it also pays a lot of attention to environmental sustainability. It has been carbon-neutral since 2007. Its data centers use 50% less energy than a typical data center. And it has invested in renewable energy projects around the world.
And then, financially, it has really an incredible business. It has over $70 billion in net cash on the balance sheet, which is about 15% of its market value. It has midteens returns on capital. It generates over $15 billion dollars in free cash flow every year. So it is an incredibly strong company financially, but we think it also does a lot of good things for people and for the environment.
President Robert Burnstine of Fairpointe Capital says his large position in Twenty-First Century Fox Inc (NASDAQ:FOX) is because of the company’s strong assets and margins, as well as its ability to buy back stock.
Twenty-First Century Fox, I think, just has great assets. They’re really in three primary lines of business: cable programming, television and filmed entertainment. And the real core jewels of the business are the cable assets, which generate probably 50% of the revenue and 75% of the cash flow of the company. The company has very good margins.
The assets that they own are things like the Fox network, Fox News cable network, FX, a number of regional sports networks, which I think are very valuable and don’t get accorded near the value that ESPN has but may be more attractive because you’re dealing with local content, and people tend to be very loyal to their local teams.
And they also have some hidden assets. They have a close-to-40% interest in Sky (LON:SKY), which is the European direct broadcast satellite business, which is worth several billion dollars, but they don’t get any credit for that.
The company has good margins. They throw off a lot of free cash flow. They’ve been buying back a lot of their own stock, $6 billion to $7 billion per year, which is 7% or 8% of the company annually.
Anthony Zackery, Associate Portfolio Manager at Zevenbergen Capital Investments, says Tesla Motors Inc (NASDAQ:TSLA) reflects his firm’s philosophy of investing in companies that benefit from technology advancements and are in the early stages of a growth curve.
Tesla is a technology company that happens to fall into the automobile category. They are disrupting a traditional mode of transportation. We believe they have really yet to crack the market. Up to this point, their products have catered to niche, wealthy customers, so we look forward to the production of its Model 3 mass-market vehicle.
They are in growth mode. Underscoring Tesla’s bright roadway, the company received hundreds of thousands of reservations and down payments for its Model 3 vehicle. Time will tell with regard to electric-vehicle adoption, but Tesla is pushing the boundary.
