Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Cedric de Fonclare, manager of the Jupiter European Special Situations Fund to give his Three Stock Picks.
Hi, Cedric.
Cedric de Fonclare: Hello.
Wall: What's the first company today?
Fonclare: The first company I would like to mention is Pandora (PNDORA), which is the affordable jewelry retailer. I mean you probably know the brand here in the U.K. You can see it on buses at a time of Christmas time or Mother Day etc. So, they've got a very nice growth in U.K. but generally it's a western world play, so they've got a very strong footprint in U.S. and growing very fast in Germany. Now where is the upside? The upside is that they've got nearly no business in Asia and they are just expanding successfully in Asia. I know it's a tough environment, but they are starting from a very, very low base and actually they've got quite a good success in a lot of Asian countries at the moment.
Wall: We have seen some retailers expand into emerging markets, such as Tesco, I know food retail is slightly different.
Fonclare: Yes.
Wall: And they've had their fingers burned. I mean what's going to be different about Pandora story?
Fonclare: I think it's the pace about how quickly you open shops. If you got even a very successful brand like LVMH Louis Vuitton is closing shops now in China. So, it's all about extravagance and aspiration about how much growth there will be in these countries which pushed retailers to open lot of shops. In the case of Pandora, they know the situation is tough and they go slowly. The attractiveness about the business, it is extremely cash generative business.
The silver price has been coming down, they don't decrease their prices at a retail space because consumers have got no idea that these items will cost less to manufacture, so the gross margin and the margin is very, very high, the cash conversion is extremely high as well. At the same time, this company doesn't need the cash dip what we're seeing and therefore they are returning that in the form of dividend which is about 2% and share buyback that they just announced which is 5%, so we're getting already a 7% total return without thinking about the earnings growth.
Wall: What's the second stock today?
Fonclare: That's a controversial one. It's Tenaris (TEN), which is doing a seamless buy for the oil and gas industry.
Wall: Which I think most people would think not today, not now, not at the moment.
Fonclare: Clearly. I have been away from that sector for a number of years and that's the first time investing in that company in recent years. 1% position, but we think that's already – the current valuation is just counting very, very unfair scenario. What's happening is that the company obviously today has got half of the profit they have been able to achieve in the past, function about people are doing less, basically less production, less exploration, but when you look at the balance sheet of that business, this is a company which is sitting on $1.7 billion cash on their balance sheet.
Now they are investing in that business not to increase capacity, but to modernise and to catch the cost leadership advantage and when your price re-bounce and I have got no idea when it's going to happen, but in the meantime they get the 4% dividend yield, that company is very much exposed to that kind of theme, so that will be one of the survivor out of the crisis.
Wall: Basically, they can afford to sit out the oil price.
Fonclare: Clearly. Cleary they can afford, and again it is a cyclical industry where we are at the very low point of the cycle at the moment. Current share price is discounting that returns will stay at this very depressed level for all the time, which is very unfair given the cyclical nature of that business.
Wall: And what's the third stock?
Fonclare: The third one is a French company if I may, and it's called Vinci (DG). It's a construction company. It's a European play and the French play to some extent. So they're operating motorways particularly in France. Now the French economy is slightly improving obviously from very depressed levels, which means that consumers get a bit more money particularly with the oil price going down, so they can afford driving more of their car. That's one big driver.
The second driver with that business is the construction-related activity, and again we had several evidence for number of companies recently that the construction industry is improving in France at the moment, so they are geared to that, and the same time you've got the cash flow generation coming from the concession business and it's 7% to 8% you know cash flow yield type of stock and they are returning nice money also to shareholders.
So, it's not a high growth company, but I think it's a visible growth that so many people are overpaying at the moment when you think about Nestle and others. I don't buy those stocks. I find them too expensive. And in case of Vinci, I think you get the same kind of visible growth, but at lower price.
Wall: Cedric, thank you very much.
Fonclare: My pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
