Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and joining me today to give his three stock picks is Francesco Conte, Manager of the JPMorgan European Smaller Companies Trust.
Hello, Francesco.
Francesco Conte: Good morning.
Wall: So, what is the first stock you'd like to highlight today?
Conte: Well, the first one is Rémy Cointreau (REMYF). It's a French spirits company. What I think people don't quite appreciate is that it's not really a spirits company, but it is increasingly becoming a luxury goods company. The CEO came from Louis Vuitton a couple of years ago and when she joined the company she was talking to one of the senior managers and he started talking about cases. And she said, what's a case? And he said, well, that's what we do.
We sell cases of spirits. And she said, no, we don't sell cases of spirits; we sell a luxury product. So, if you Google, for example, Rémy Black Pearl, you'll see that some of their bottles go for $10,000, $20,000. They've even auctioned off one bottle at $95,000. So, whereas people might look at it and say, this is expensive compared to, I don't know, a Pernod Ricard, it's really very, very unique in the industry, because there are not many bottles that people can sell for $20,000. So, a very, very special company.
Wall: And the economy is robust enough to support luxury goods, because it is one of the sectors where in a downturn it does get hit, doesn't it?
Conte: So, cognac sales – the biggest market for cognac is the United States which has continued to grow very, very quickly, I mean, 20%-odd. China had become a very important market for them, but it fell sharply for about three years and then started recovering sometime early last year and Europe is starting to recover as well.
So, one of the curious things about Rémy is that normally these luxury goods companies grow very quickly when they actually go down market, selling keyring, so to speak. They've actually been growing very quickly by going up-market, so they've been actually cutting the bottom brand, because there's only so many grapes that they have available and so, why sell them for €40 a bottle when you can sell them for €60 a bottle at the low end.
Wall: And what is the second stock today?
Conte: The second stock is Ubisoft (UBI). It is also a French company. Very unique, started, I think, when the founder was a very young man. In those days, it was a real, kind of, you do it in your bedroom kind of thing.
Wall: Computer games.
Conte: Computer games, video games. They are the third largest in the world, largest in Europe. They have huge titles such as Assassin's Creed, Far Cry, et cetera. And today, it's an extraordinary industry because each game costs more or less $200 million, say, $100 million to develop in terms of software, another $100 million or so to market. So, the number of companies that can really put that kind of money on the table…
Wall: Have that clout.
Conte: …there's only four around the world. And so, the market is being consolidating not through M&A, but really through the fact that companies can't afford these things, or the development. But these games – and I see it when my son, I'll see him wearing headsets and I say, what are you doing? And he says, I'm playing with my friend in Canada. And I don't know you had a friend in Canada. Well, we've been playing for a few weeks now.
And so, there are communities. In the old days, you buy a disk and you would, I think, on average play 25, 30 hours and get bored. Now, because there are communities, because people are playing online they never get bored of the game because it changes all the time.
And so, obviously, the ability for Ubisoft to make additional margin out of the customer by selling him an extra whatever it maybe, an extra gun or an extra outfit, is enormous. And bear in mind that now because it's online, the company knows where you are going and they can encourage you…
Wall: Clever marketing.
Conte: They can encourage you to go to a different part where you will find that thing that you're more likely to buy. So, it's a fantastic business where the margins are going up very quickly, probably faster than sales and where they are brilliantly positioned because they are in terms of open world games, they are actually the leaders in the world.
Wall: And what's the third and final stock?
Conte: The third and final stock is – one of the things that people always criticize Europe for is aging. And Italy is the worst or the most aging country in Europe along with Japan, the second most aging country in the world. But it does throw up opportunities, of course. And so, the largest hearing aid retailer in the world is an Italian company called Amplifon (AMF) that is leader in Europe, in the U.S. and Australia. This business is not an emerging market business. These hearing aids are too expensive costing very often thousands of dollars.
And the beauty of this business model is that as we're growing older, they in case growing at about 7% a year. They generate a lot of free cash flow because they don't own the buildings, they only rent the buildings, and with that free cash flow they make additional acquisitions. So, typically, they grow more than 10% a year.
Now, the curious thing when we look forward is that their average customer is 72-years-old. So, if you go back to 1946 when the baby boomers started and add 72, you get to 2018. So, there are not many companies where theoretically pretty visibly growth should actually be accelerating and of course, the baby boomer didn't last one year, two years; it lasts at 15, 20 years. So, you could have an incredibly accelerating top-line for this company over the next few years. And I see very little to stop them. Moreover, there's no technological risk because they buy the hearing aids from three global suppliers and they pay a massive discount compared to the little shop around the corner. So, I don't see much technological risk. I don't see much competitive risk. It's really a fabulous company.
Wall: Francesco, thank you very much.
Conte: Not at all. Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
