Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and here with me today to give his three stock picks is Lewis Grant, manager of the Hermes Global Equity Fund.
Hello, Lewis.
Lewis Grant: Hi, there.
Wall: So what's the first stock today?
Grant: The first name is Toyota (7203), it's a company most people are familiar with and it's the largest car manufacturer in the world. And the reason we really like Toyota is because it's a very steady company. It's a company that I would say ticks all of the boxes. So they have a very strong balance sheet. They have good stable growth and they have high margins that are increasing. They also have an attractive valuation and they are benefitting from the weaker yen.
But what's really interesting about Toyota for us is they have a real focus on corporate governance and this is very unusual in Japan.
They're actually one of the leaders in corporate governance in Japan. Over the last couple of years, we've seen them take positive steps such as, they've added two independent directors to their board and that's the first time in their history that they've done this and it's a real positive step that for us as long-term investors, we think is a great sign and a great opportunity.
Wall: Japan on the whole has a problem with an aging population, with the shrinking number of individuals of working age and companies such as Toyota, which are quite labour intensive are damaged by this. Is this a concern for you or is automation going to fill that void?
Grant: I think automation is definitely a big answer there, but we do need to keep an eye on the demographics. We're very bullish on Japan generally and the demographics is one of the biggest headwinds there. We are positive that Abenomics will take further steps to resolve this. We've seen steps in the right direction, but not enough and we're watching closely to see enhancements there.
Wall: And what's the second stock today?
Grant: So the second stock is another Japanese name, it's Kyocera (6971). Their main product is ceramic components for semiconductors. Now when you think of Japanese technology companies, you probably don't think of Kyocera, you probably think of Panasonic and Sony and Nintendo, big consumer brands and generally, their best days are behind them.
When you think of component manufacturers, you probably don't think of any Japanese companies, you probably think of other Asian countries, Taiwan maybe. But actually the high-end components are still coming from Japan. So when Apple and Samsung, when they make their latest smartphones, when they make their tablets and they want bespoke high-quality components, they go to Japanese companies such as Kyocera, who are able to offer that customization of a very high-quality semiconductors over their components. They're also a very diversified company, so they do offer a whole range of different products and that takes a lot of volatility out of the stock.
Wall: And I suppose that also mitigates the risk that if Apple turnaround tomorrow and said we're going elsewhere; it's not going to be as damaging?
Grant: I think that's absolutely true. There is no one dominant customer and that's really important for us. We're not into single bets that can just turn overnight, that's not what we do.
Wall: And what's the third stock today?
Grant: So the third stock is a European name, and it's Valeo (FR), a French auto parts manufacturer. This is an example of a company who has completely turnaround their business over the last few years, have been a very difficult few years and they focused on fully restructuring, trimming the fat and removing parts of the business that weren't adding value.
And they now just have two main product lines. The first of those focuses on CO2 emissions technology. This is obviously a huge theme in the auto parts company – auto parts industry and they are really leaders in this space.
Their other focus is on intelligent driving, this is automation, this is the automatic wipers and headlights, all the way through to self-driving cars. So the stock is really focused, the company is really focused on these two key themes in the auto industry.
The stock isn't cheap though. It is trading at a high multiple compared to its peers. But when you look at its growth, when you look at its high margins and you look at how perfectly it's positioned in the industry, I think that valuation is more than justified and can actually go higher still.
Wall: You we talked about the sort of innovation side of this business. I know from a visit I did recently in Japan and also anecdotally the U.S. are really pushing towards the automated cars. I mean, how much of a global player is this French company or is it threatened by countries that are more technologically diverse?
Grant: Not at all actually. One of the focuses for Valeo over the last few years has to become a full global player and they really are now in with all of the big car manufacturers. They really have a global exposure and are really one of the leaders in this space.
Wall: Lewis, thank you very much.
Grant: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
