Principal Financial Group Inc. (PFG) CEO Larry Zimpleman says he sees growth opportunities in the company’s asset management and international retirement businesses. To that end, Zimpleman says PFG has completed seven acquisitions in those segments in recent years, investing a total of $2.2 billion of capital.
“I think the other perhaps lesser-known feature is that we fairly dramatically reshaped the businesses, not necessarily because of the financial crisis, because this reshaping actually started in 2007,” Zimpleman says. “If you look at our 2013 operating earnings, which is the best measure of financial performance, we had basically $1.06 billion in earnings. That was a record, just surpassing the prior record, which was like $1.058 billion in 2007.”
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Zimpleman says that from 2007 to the present, Principal Financial Group has replaced about $150 million of spread-based and risk-based business with fee-based business. He says fee-based business now represents 63% of earnings.
“In 2007, we had only about 45% of the earnings being fee-based,” Zimpleman says. “So we’ve made a fairly dramatic transition over that period of time and we plan to continue that transition with higher percentages of earnings coming from fee-based business.”
Portfolio Manager David Abella of City National Rochdale is encouraged by Dr Pepper Snapple Group Inc.’s (DPS) efforts to turn around sales in canned soda, as well as the company’s attractive valuation and dividend.
“The company has big exposure to canned soda obviously, and that market is a bit weak right now in terms of its growth. But we feel Dr Pepper Snapple has a great franchise and attractive valuation of 15.5 times earnings, a nice dividend yield of 3.1%, and it’s growing in the low single digits,” Abella said.
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Dr Pepper Snapple Group is trying to get to the next level by introducing products such as Dr Pepper TEN, which has just two grams of sugar, Abella said. He believes the company is being more proactive than its competitors The Coca-Cola Company (KO) and PepsiCo, Inc. (PEP).
“They are making a very strong effort to reformulate their beverages to appeal to today’s consumer wants, which is less sugar but satisfying taste,” Abella said. “We’re encouraged that they are trying to turn around the flat sales in canned soda. But meanwhile, we think there is a very steady franchise that can support the current dividend.”
Chief Investment Officer Lode Devlaminck of Hermes Global Equities Advisors is seeing long-term growth within Novozymes A/S (CPH:NZYM-B), the leading manufacturer of enzymes, due to the company’s exposure to the detergent, bioethanol, bioplastics and bio-agriculture industries.
“Their core business is providing enzymes to the household and personal care industry, primarily detergents. That market is expanding and growing as the world moves more toward high-efficiency laundry detergents, as these new and better detergents have much more enzymes in them,” Devlaminck said.
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Additionally, Novozymes A/S has a big foray into bioethanol, where enzymes are crucial in the transformation process, Devlaminck says. He also points to other growth avenues that he is watching.
“You also have a whole trend in bioplastics, which is another avenue of growth for them. Last but not least, they created a joint venture with Monsanto (MON) that gives them a big platform to leverage their expertise in bio-agriculture,” Devlaminck said.
Portfolio Manager David Abella of City National Rochdale is favoring AT&T Inc. (T) because of its 5.7% dividend yield plus opportunity for more growth, in addition to possible capital appreciation.
“Right now we like AT&T primarily because of the yield, 5.7%. We feel that there is a potential growth in the yield in the 3% to 5% range. That’s a little higher than it’s been in the past few years, but we do feel that there is the potential for growth,” Abella said.
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From a valuation point of view, Abella feels that AT&T is a bit cheap right now at 12 times earnings. Going forward, he expects solid returns and yield opportunity.
“If you take the dividend yield, plus the growth in yield, plus some potential capital appreciation, we think that this stock can be a very base-hit type of investment, with expected returns in the high single digit to even low double digits over the next couple of years,” Abella said.
Portfolio Manager Gary Anderson of Scout Investments says that Bayer AG’s (FRA:BAYN) return on equity profile looks promising, and he believes the growing worldwide demand for food as well as pharmaceuticals for an aging population will continue to drive Bayer AG.
“[Bayer AG’s] ag chem division will benefit from a growing worldwide demand for food. The emerging markets around the world are moving to a greater demand for a Western diet. The demand for ag chemicals and seeds to provide and augment that diet I think is going to continue to grow,” Anderson said.
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Additionally, Anderson says demand for pharmaceuticals for an aging population will lift Bayer AG going forward, as the company makes blockbuster drugs that deal with aging health issues. He also says Bayer AG has a healthy return on equity profile and is reasonably priced.
“The return on equity profile again is very promising. They were in their lower teens not long ago and are moving into the mid-20s. Their long-term debt to equity has dropped from 70s down to 27, and their p/e ratio of 13.8 and dividend of 2% is I think again a reasonably priced company, and I think the future looks promising for Bayer,” Anderson said.
CEO J. Mike Stice of Access Midstream Partners LP (ACMP) is giving investors a line of sight directionally on how the company is expecting to perform by keeping up with three years of EBITDA, growth capital and maintenance capital guidance, and he is anticipating growth in numerous areas.
“In 2013, we guided to our EBITDA — our earnings before income tax, depreciation and amortization — that we’d make $800 million to $850 million, and as I mentioned earlier, we closed the year at $858 million. For 2014, we’ve guided to $1 billion to $1.1 billion, showing the growth that is anticipated. For 2015, we’ve guided to $1.2 billion to $1.3 billion,” Stice said.
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Additionally, Stice is giving investors guidance on Access Midstream Partners’ growth and maintenance capital, which for 2013 ended in line with expectations.
“Our projected growth capital in 2013 was $1.6 billion to $1.7 billion, and more around the $1.6 billion number is where we ended up. In 2014, we guided to $1.0 billion to $1.1 billion in growth capital, and we guided to $800 million to $900 million in growth capital in 2015,” Stice said.
“We had a maintenance capital in 2013 of $110 million, which was spot on. We expect 2014 to be $110 million, and 2015 to be $110 million as well,” Stice added.
Director Elvira Scotto of RBC Capital Markets views Plains All American Pipeline, L.P. (PAA) as a core holding for MLP investors, as the company has flexible midstream assets that connect it to multiple markets. Scotto forecasts Plains All American to spend a significant amount in growth projects over the next year, which will drive cash flow and distribution growth.
“Plains has a very well-positioned asset base with flexible midstream assets. Its footprint spans across growing resource plays, including the Permian Basin, the Bakken Shale, the Mississippian Lime and the Granite Wash. Plains has a wide range of flexible crude oil assets, including pipelines, rail loading and offloading facilities, barges, trucks, etc., that connect to multiple markets,” Scotto said.
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Scotto believes Plains All American’s sizable growth project backlog will drive cash flow in the years to come. Other characteristics such as a strong balance sheet and distribution coverage are behind her pick for Plains All American as a core holding.
“[Plains] plans to spend about $1.6 billion to $1.8 billion in growth projects this year, which we believe will drive cash flow growth for years to come. In addition, given its footprint, we believe Plains can continue to identify growth projects, and we forecast growth capex of more than $1 billion next year,” Scotto said.
“Plains also has a strong investment grade balance sheet and strong distribution coverage, which we believe well-positions it to fund its organic growth capex. We forecast about 10% distribution growth for Plains over the next few years,” Scotto adds.
Piper Jaffray & Co. Analyst Matt Miksic says he sees significant room for Zimmer Holdings, Inc. (ZMH) to grow over the next year. He says Zimmer’s volumes didn’t increase from the fourth quarter of 2013 to the first quarter of 2014 due to seasonality, but he expects growth to improve in 2014 and again in 2015.
“It hinges on the turning-the-corner call that we have been making now for almost two years,” Miksic says. “The stock did well in 2012, and then performed substantially better than the market in 2013, ending the year with some of the best growth rates in U.S. knees we have seen in four to five years.”
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Zimmer has the best exposure to hips and knees compared to other orthopedic manufacturers, Miksic says. He says the company also has a significant amount of fixed assets and manufacturing leverage focused on its hip and knee business lines. As a result, Miksic says Zimmer is his best call in the sector, but he also sees upside for other orthopedic manufacturers.
“I would say that if the market continues to improve, it would probably be silly not expect the rising tide to lift all boats in orthopedics, including Stryker (SYK) and Smith & Nephew (SNN),” Miksic says.
We could see a new robotic surgery instrument from Intuitive Surgical, Inc. (ISRG) before the end of this year, according to J.P. Morgan Analyst Tycho Peterson. He said the company filed for a trademark on a news system and that finished goods inventories went up last quarter.
“There are some subtle signs that things could be moving in the direction of a new system launch,” Peterson says. “Overall, there is a huge underpenetrated opportunity for robotic surgery, and they are going to be the ones best positioned to capitalize on it over the next couple of years.”
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Peterson says that although Intuitive Surgical had a rough 2013 because of concerns over adverse events and outcomes, investors should keep a close eye on the company, which he believes is poised to grow this year. He says Intuitive Surgical has spent more than $700 million on research & development since launching its last product. A new product launch will be the key for Intuitive Surgical to reaccelerate growth, Peterson adds.
“We’re at the tip of the iceberg in terms of the market converting over to robotic surgery,” Peterson says. “They have managed to penetrate the prostate market and most of the hysterectomy market, but there are still opportunities in general surgery, so this is absolutely one I would be watching.”
Insulet Corporation CFO Brian Roberts says the company is working to launch a new version of its OmniPod insulin pump that is specifically designed for people with Type II diabetes. Roberts says Insulet plans to file for clearance of the new product with the FDA this year, and hopes to bring the pump to market in 2015.
“Back this past spring, we signed a partnership with Eli Lilly and Company. And that partnership was for us to modify our software, our hand-held of our insulin pump system, to design a version of the pump, which should be used with their Humulin U-500 insulin — which is a more concentrated, more potent form of insulin,” Roberts says. “That insulin is typically geared towards people living with Type II diabetes, who usually are more highly insulin-resistant, and therefore, require more insulin per day.”
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Roberts says people with Type II diabetes typically need more insulin each day compared to people with Type I diabetes. He says as insulin doses increase, compliance with a prescribed regiment tends to decrease. He hopes the new version of the OmniPod pump could help to solve that problem.
“People wouldn’t want to keep giving themselves more doses or maybe more shots, and so compliance would drop,” he says. “But being able to leverage the OmniPod for those patients using U-500 insulin, you can reduce the amount of insulin they need to take over the course of a day, and again, hopefully improve compliance.
