Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Mark Nichols, Manager of the Threadneedle European Select Fund, to give his three stock picks.
Hi, Mark.
Mark Nichols: Hi, Emma.
Wall: So, what's the first stock you'd like to highlight today?
Nichols: First company I'd like to talk about is Pernod Richard (PI). Pernod is French listed. It's the number two drinks company in the world behind Diageo. And for us, the key angle on the investment case is growth, growth opportunities. So, if we look in the Chinese market today, less than 1% of all spirits consumed are imported.
It's still predominantly a market for local spirits like baijiu and yet, it is a market with a long history of drinking cognac in particular and with the Martell brand there is a real opportunity, we think, in the much longer term for penetration and growth there for Pernod.
It's also true that India is a big opportunity for them, a market currently growing high-single-digits. Indians consume 50% of the world's whisky and yet, less than 1% of that today is scotch, so again, an opportunity to premiumise the market, get value and volume growth out of that market. And probably, most importantly, the U.S. market, surprise maybe to some people but Jameson is growing there at north of 20% year-over-year. They have just launched a product called Caskmates. It's gaining a lot of traction.
And Martell Cognac is growing at 25% year-over-year, again capturing a bit of a vibe in the market amongst certain demographics. And that's the thing that Pernod is really, really good at, connecting with consumers, understanding consumer habits and understanding how to maximise value from the brands that they have, getting more of their products sold in cocktails and less of it sold through supermarkets and that becomes a very attractive long-term story with demographics driving people away from cheaper products like beer, for example, and more towards more premium products like scotch and cognac.
Wall: And what's the second stock?
Nichols: So, the second name I'd like to talk about is Akzo Nobel (AKZA), a Dutch-listed company and the European leader in coatings. So, do you mean that's paint? They are in the Dulux brand, which consumers in the U.K. will be very familiar with. That product has got a 50% market share in the U.K. And we always run the risk of being accused of coming out with ideas that are about as interesting as watching paint dry. So, when we talk about paint, it becomes even more of an issue. But paints is a really great investment.
So, listed in the chemicals sector in all of the indices that we look at and yet this is a consumer-facing product. It has branding. It has high market shares and it's selling to an audience that are not sufficiently sophisticated to know what the price of a tin of paint should be from one moment to the next. So, on average, people paint their homes once every six or seven years.
Quite often they will hire a decorator. There is a bit of disintermediation between the buyer and knowledge in terms of the value of the product and often people also care more about the color of the paint they are using than they necessarily do about buying the cheapest product they can find.
And what that does is it creates significant pricing power and that's happening in the context of a global industry that's consolidating and it's happening in the context of a management team at Akzo that over the last five years since the new CEO came onboard have managed to see operating margins go from a little over 6% to a little under 10% and they have done that with no real volume growth. So this really is a self-help story in an attractive industry.
Wall: And what's the third and final stock?
Nichols: Third stock I'd like to talk about is a Swedish-listed company called Autoliv (ALV). They are the world's leading supplier of passive safety products for cars, so again, sounds a little bit dull. That's airbags and seatbelts. There's a penetration argument there. So, if we went back 30 years, there were no air bags in cars. Today there are any number in there, not just in the steering wheel, the passenger has one, there are headrest airbags, curtain airbags, et cetera and there is a real penetration market there in emerging markets.
So, as we've seen the number of cars per household go up in China, we're also seeing the number of airbags per car rising. So that gives them a nice volume growth story. They are also one of the market leaders, the global number three in active safety. So that's radars and equipment that helps assist the driver and get us towards driverless vehicles and that part of the business is growing north of 30% year-over-year and we think that's – frankly, we just think it's undervalued in the mix of the rest of their business and again, we think that's a very attractive opportunity.
Wall: Mark, thank you very much.
Nichols: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
