Emma Wall: Hello and welcome to Morningstar. I am Emma Wall and here with me today to give his three stock picks is Dean Tenerelli, Manager of the T. Rowe Price European Equity Fund.
Hello, Dean.
Dean Tenerelli: Good morning.
Wall: So what's the first stock today?
Tenerelli: The first stock today would be Prudential (PRU), which is an insurance company listed in the U.K. but with a global footprint. Prudential has a big business in Asia and the U.S. and of course in the U.K. as well.
The exciting thing is that the Asian business is largely underpenetrated business where penetration of life insurance products is very, very low. So, Prudential is poised to grow their business there through increased penetration over the next years and it provides great sales momentum to the stock itself.
The other interesting part of it is in the U.S. actually where there has been potential changes in regulation and lowering in tax rates, which has meant that there should be many catalyst this year for the business itself.
So between the superior growth rate in Asia and the changes in business momentum in the U.S., Prudential is poised to have a very interesting year and actually coming years.
The other thing I would say is that it's a very well managed company, all of its marginal business is written at over 20% ROE (return on equity). So the profitability of the company is great. And you get all of that on a sector multiple of 10.5 times.
So it's a really interesting growth company which grows at an average two times the sector that you are getting at a sector multiple of 10.5 times. So I think it should be a very good stock for the next coming years.
Wall: And what's your second stock today?
Tenerelli: Second stock would be British American Tobacco (BATS), which everyone knows is a tobacco company. And the interesting thing about BAT is it grows pretty much two times what the other tobacco companies grow, and it has the largest potential to increase its margins. We expect that its margins will go up by 50 basis points per year for the foreseeable future. This is through a combination of focusing on their global brands which has allowed them to take market share and is causing superior growth, and also the integration of the Reynolds acquisition which will be completed this year and has recently been announced.
So again in the case of BAT, you are getting superior growth and a very reasonable valuation of 14.5 times PE or a 6% free cash flow yield. I think BAT is a very exciting stock for certainly the next coming years.
Wall: And the third stock is a little less well known, isn't it?
Tenerelli: Yeah, the last one is a small cap. Small cap in my fund there is always an interest I have in finding unusual or underknown or unknown small companies, which I think add great value to the strategy; and SimCorp is one of them. It is however the leading provider of software for the fund management industry and they have leading market share positions in Europe and they have a very small business in the U.S.
And so the company now is entering the U.S. through their superior technology better than their competitors, they spend up to 20% of revenues in R&D. So they invest very heavily in technology to have a superior product, that is allowing them for their first year 2016 to have an order book which is greater than 50% in the U.S. So we're seeing success in their growth rate in U.S. and obviously that's a huge market for them to penetrate.
So it's a very interesting business, very profitable it's a software company with 70% return on capital. So not a lot of capital involved. And will generate superior growth rate we think of about 8% to 10% in revenues for the foreseeable future.
Wall: Dean, thank you very much.
Tenerelli: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
