Emma Wall: Hello and welcome to Morningstar. I am Emma Wall and here with me today to give his three stock picks is Jamie Hooper, manager of the AXA Framlington U.K. Growth fund.
Hello, Jamie.
Jamie Hooper: Hi.
Wall: So, what's your first U.K. stock?
Hooper: The first stock, I'd like talk about is a U.K. company but very much a player on global economic growth. It's one of my core compounders, if you like, my long-term winners, these companies that can do it year-in and year-out. Company's name is Compass (CPG). It's the world leader in contract catering, which is a £200 billion per annum market. They dominate, but they only have a 10% market share. So, it's incredibly fragmented. There are wonderful opportunities for synergies, economies of scale, et cetera.
Half of the business is coming from North America, which we know has had an economic upturn. Thirty per cent is from Europe and the U.K; U.K. is recovering strongly. They've take strong restructuring efforts in Europe. And then finally 20% is from emerging markets. So this is the kind of company that I love. I mean this is 4% to 5% organic earnings growth, 8% to 9%-10% earnings growth and then you add to that a nice dividend yield and nice share buyback. So a great company as a long-term core holding.
Wall: For somebody who doesn't know the company, hearing catering and hearing emerging markets, is there not a risk that they will never – they will just be undercut by domestic companies in that region because they won't be cheap enough?
Hooper: There is a case for that. They actually would argue that's the very opportunity. You have lots of individual, very small independents who cannot procure, obtain, fulfill contracts on the same economies of scale that Compass has. Compass is buying across the world, is a preferred supplier and they can offer preferential terms to either businesses or local government authorities in those geographies.
Wall: And what's your second stock then?
Hooper: The second stock is quite different. It’s a play on domestic cyclical recovery, its Hays (HAS), the specialist recruitment company. About a third of its business is exposed to the U.K., which we now know is showing incredibly strong recovery. 20% is exposed to Germany, which has a strong structural growth. The balance are other economies, but predominately Australia, which has been woeful. It's had a 70% decline, predominantly due to the mining industry, but we now see signs of stabilisation.
The company's next update is in April and we expect that to exceed expectations. And finally, over the next 12 to 18 months, I suspect greater capital returns either through dividends, share buybacks and special dividends.
Wall: I mean that company strikes me as one that's very sensitive to what's going on in the macro, what's going on in the economy. Does that worry you, or is that part of the play?
Hooper: Yes. It's very operational geared, as you say to the recovering developed markets. Developed markets about five years of turmoil, it is only really now we're in the nascent signs of recovery. Let me put it to you clearly. Consensus profit expectations for the U.K. in a couple of years' time is £40 million. This company owned £140 million at its peak. I think the balance of risk to market expectations, are clearly on the upside.
Wall: What about the third stock then?
Hooper: Again a different kind of stock. This would be a mega cap. Mega caps, generally we call them ‘mega-traps’ you wish to avoid them. In the U.K. almost 50% of our market is very concentrated in 20 companies, and I generally try and avoid those. But on occasion when they are both cheap and changing, selectively I look to acquire. Now AstraZeneca (AZN) is a company that I've been buying over the last three to six months.
What's its story? Well, it's been subject to numerous generic challenges and patent expires. Profits have been in decline for a number of years. But what's changing? Firstly, they've got a very strong balance sheet and they are going to employ that to make bolt-on acquisitions, which will start to boost profits. But secondly, more importantly, they have a wonderful pipeline of drugs particularly, in the immunotherapy cancer treatment area. And therefore I think that they will again, exceed expectations.
And then perhaps was finally, just simply from a portfolio construction perspective. Markets have run hard and they've run well for a long time now. If one is concerned that a correction is due, this has a low beta, so it’s very cautious and defensive, which is all part of creating a balanced core portfolio.
Wall: I think people hear pharmaceutical and they do think patent cliff. You are saying that these drugs are coming through the pipeline, is that a guaranteed source of revenue?
Hooper: So they have 35% declines. Again, we are very interested in consensus expectations. Some people have been downgrading for five years and it's interesting that people are coming to the end of the downgrades. There is also a new management to the company, who acknowledge that. But now advocate that profits in 2017 will be the same as they were in 2012. That's very aggressive, but it's very positive relative to quite a bearish consensus opinion on this company.
Wall: Jamie, thank you very much.
Hooper: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
