Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and here with me today is Jeremy Thomas, Manager of The Brunner Trust.
Hello Jeremy.
Jeremy Thomas: Hi, Emma.
Wall: So what is your first stock tip.
Thomas: Let's talk about Weir (WEIR), which is listed in the U.K. and it makes pumps for the mining sector and the oil and gas sector. You'd have been well aware of shale oil and shale gas in the U.S. and Weir is extremely well exposed for making what they call frack pumps for that market. That market and the mining sector, have been through a slightly less good time recently. But it's absolutely the time we like to invest, when people are skeptical and pessimistic about that market.
We work with a company which through the long run is a good quality, high returns, high margin business. Weir fits that bill. What we are beginning to see now is an improvement in those end markets. We are starting to see capacity in that frack pump market being used up, new orders beginning to come through and aftermarket sales really producing some nice cash flow. So we very much like Weir right here.
Wall: It's been a very big success story, hasn’t it, shale in the U.S., but the concept of fracking in the U.K. is still politically and culturally a little bit of an uneasy subject. Is that concern for you?
Thomas: It's not really a concern, but they don’t currently sell into that market. If something changed in the U.K. then there are no frack pumps in the U.K. and someone would have to make them and that would be Weir. Argentina has just fracked a well, it's the first one they've done used all of the fracing capacity in the whole of that country just to frack that one well. So international whilst it's not imminent or immediate, would be a new opportunity, not a threat.
Wall: So you don’t necessarily need geographical diversification to continue to profit?
Thomas: No, if we can see improvement in the U.S. that would be great, that’s what we need to see, beyond that if we see international markets pick up that would be extra nice.
Wall: And what's the second stock.
Thomas: Second one I would talk about is Monsanto (MON). Which is something we’ve been looking at over the last 18 months or so and have invested in. It's a seeds and traits business, its genomics and it's not likely to be in Europe at least not for some time. But it's very important that places like Latin American are going to be the bread basket for Asia are able to increase that crop yields.
What we particularly like about the company right now is a new product called INTACTA. Which produces a soybean seed which is resistant to a particularly nasty caterpillar, which reduces yields for farmers in Brazil. We use a grassroots part of our research. We get out there and speak to farmers and the feedback we are getting on INTACTA in Brazil is really exciting. The farmers just can't get enough of it and we expect that to really surprise in its growth.
Wall: Does GM face the similar challenge as that the pharmaceutical market does? I mean, is there such thing as a patent in that industry? Or can you just continue to make these specialist products?
Thomas: It's not quite as difficult as that. Technology and R&D is very important and Monsanto is very much the largest, has the biggest budget and they do need to keep innovating. So that is important, but they've very successfully done that in the past. You don't tend to reach these patent cliffs where you end up with a product, which is similar but slightly different and when it goes off patent, being sold at much, much reduced price that doesn't happen. So you don't get those nasty drop offs in cash flow.
Wall: And what's the third stock?
Thomas: So the third stock is Priceline (PCLN), which is an online company. Very much involved in online travel, which we like as well. We've owned Amadeus (AMS) and so on in the past. We've seen quite a big correction in some of these internet stock valuations. Priceline is quite different, it's actually on a P/E multiple you would recognize. It generates lot of cash, has 40% margins and it's still growing very nicely.
In Europe, we would know it as Booking.com, but that they have other websites as well. Still quite underpenetrated and many of your viewers will probably have used or looked at Booking.com, there are still many hotels who don't use it and many room nights that aren't booked through that channel. So we see lots of room for growth there and it's very exciting tech, software company, that's on a sensible multiple, quite right.
Wall: It's also a company that faces extreme competition. I mean, you and me have tough day at work and watch daytime television every other advert if it's not payday loans are for these holiday aggregator sites. How do you sort of leap that barrier where you say that the market is underpenetrated, but it's because there's so much competition.
Thomas: There is quite a lot of competition, but someone like Premier Inn only uses Booking.com. They are dominant and what you tend to see is a lot of -- one these advertising on TV, trying to get into that market because the returns and the margins are attractive that is our key risk. If we saw a competitor really starting to make inroads in to that market in Europe than that would be a concern. We don't see that today, but it's something we do take quite close care of.
Wall: Thank you very much, Jeremy.
Thomas: Pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
