Bigger than Brexit : hitching a ride on global growth
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Some of the most exciting growth stories on Speirs & Jeffrey’s research coverage list are global industrial leaders with names many of our clients will recognise only vaguely, if at all. Others are well-known brand names that share an important characteristic with those more obscure companies: they are carried onwards and upwards on global trends that seem likely to last. We make no claims that in describing these well-priced companies we are revealing hidden gems. Price/earnings ratios in the mid-20s attest that their growth potential is widely appreciated. Instead we offer them as examples of how the wider global industrial dynamics are more relevant to our investment strategy than the question of Britain’s exit from the EU, although the latter subject generates infinitely more commentary.
These industrial, chemicals or technology companies have earned their place on the list following close analysis by our research department. Apart from their broad classification, the characteristic they have in common is that the issue of Brexit is all but irrelevant to their global strategy. It appears well down their list of potential growth-disruptors - if it features at all.
That includes the British companies. A good example here is Croda International, a Yorkshire-headquartered chemicals pioneer since 1925, whose global network of factories produces the ‘active ingredients’ for cosmetic creams and lotions, dietary supplements and other purposes. Croda’s R&D department spends up to 14% of revenue, and has even sought out indigenous tribal expertise to develop its Crodamazon range of Amazonian oils. As we see it, the company’s growth prospects are based on relentless demand for product innovation from the likes of L’Oreal or Procter & Gamble, who are eyeing growing demand for anti-ageing and other ‘personal care’ products from increasingly pampered high-growth consumer markets such as China.
Intertek is another UK business-to-business giant (market cap £8bn) with a long history and impressive global coverage. This inspection, product testing and certification company has a growing network of laboratories responding to ever-increasing scrutiny of the quality and safety of manufactured goods. As the manufacturing supply chain becomes ever-diversified and the movement of cargo increasingly complex the need for reassurance on standards becomes more pressing. Intertek, with its scale, reach and reputation is well-placed to reap rewards from globally proliferating regulations. Demand for its services is driven by forces including increasing consumer protection, health and safety standards, as well as fair trading concerns.
The winds of change also blow favourably for Visa Inc., the high margin (60%+) leader in payments processing and credit cards with an impressive 54% of the global market. Visa’s traditionally strong banking partnerships and international presence has been superseded in importance by the shift from cash transactions to electronic payments and ecommerce. In a financial sector more vulnerable than ever to upstart disruptors, we look for stocks that seem likely to set the pace on innovation rather than fall victim to it. Visa is well placed to benefit from the continuing retreat of cash, with double-digit revenue growth and average three year earnings growth expectations around 15%.
Our final example in this industrial and technology mini showcase is the family-controlled Swiss company Schindler, our choice from the four-company oligopoly (Schindler, Thyssen Krupp, Otis and Kone) that dominates the world of elevators and escalators. Here what attracts us is their strong balance sheet, commitment to R&D and healthy performance in the aftersales and maintenance market – presumed to be even more profitable than the new installation arm. Schindler is also present, but not over-concentrated, in tomorrow’s high-rise hotspots in China and India, where seven out of every ten lifts are currently sold. A proliferation in tall buildings due to urbanisation and space restrictions, increasing wealth and larger numbers of staircase-averse older people all point to a positive future for Schindler.
For good or ill, hard or soft, the effects of our departure from the EU are more likely to be felt in the macroeconomic domain of interest rates, employment rates and exchange rates, any of which could indirectly affect share prices. But consideration of how little, relative to these global forces, Britain’s political choice matters to the companies discussed is a useful corrective, which even suggests that equities could be seen as a hedge against the gloomier forecasts about the consequences of EU departure.
Senior Research Analyst
12 April 2018