Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Rachel Winter of Killik & Co to give her three stock picks.
Hello, Rachel.
Rachel Winter: Good morning, Emma.
Wall: So, what's the first stock you'd like to highlight today?
Winter: First stock is a company called Xylem (XYL). So, this is based in the U.S. and it's a global water technology company. So, it focuses on water pumps and also water filters. There's lots of reasons why we think this company could grow. One reason is that we've seen a big increase in extreme weather.
To give you an example, we've had Hurricane Harvey in the U.S. So, huge amounts of water and flooding. They will be needing lots of water pumps to get rid of that excess water. But then in South Africa, on the other end of the scale, we've had a lot of problem with drought. So, the country is just recovering from the worst drought they've ever seen. So, they will need water technology to recover and perhaps make the most of the little water they do have.
Wall: And how broad is the scope for this company? Is it just a niche renewable stock?
Winter: Not at all, no. Very broad indeed, and there are other reasons why we think the company could grow, particularly on the water filtering side. For example, in emerging economies, there is a big problem with populations growing and we have contaminated water. So, there's a big focus on getting that water cleaned. And even in developed economies that is the theme. So, there is more regulation regarding cleaner water and sanitation. Therefore, even in the U.K. and the in the U.S., we are using a lot more water filtration.
Wall: And what about the second stock today?
Winter: Second stock is a company called Novo Nordisk (NOVO B). So, this is a pharmaceutical company based in Denmark and it focuses mainly on diabetes which is a huge and growing problem. So, at the moment, to give you an example, 10% of adults in China have Type 2 diabetes. So, that's a huge number. I mean, just think how many people that is. And at the moment, I think about 10% of global healthcare expenditure goes on diabetes.
So, a huge amount of money being spent on this disease. Some goes on drugs, but most of it goes on hospital stays from people who have to go to hospital after they have some issues with diabetes. So, if we can spend more on drugs and prevent people from getting to hospital, that will save a lot of money in the long run.
Wall: Now, we saw a pharmaceutical come unstuck earlier this year because one of its drug trials didn't to go plan and we saw significant share price depreciation when that happened. That was a cancer drug which is different from diabetes. But how sensitive is this company to its pipeline?
Winter: There definitely is some sensitivity. You can't argue with that. Actually, I think, the main issue they've had recently is that there has been some competition in this space. So, because diabetes is growing so quickly as a therapy area, a lot of companies have been focusing on it and there has been pricing pressure for some of the older drugs.
For Novo Nordisk, we think, where they are more competitive is the newer drugs in the pipeline. So, for example, they have got new drugs that can lead to weight loss as well as treating the diabetes. So, there is a lot of excitement around that. So, yes, you are right. If those do disappoint, then the share price could come down. But we do remain confident and we think it is definitely the global expert in diabetes.
Wall: And what about the third and final stock?
Winter: Final stock is called SSP (SSPG). So, it's U.K.-listed. It's in the FTSE 250. And what this does is it operates food and beverage outlets within airports and railways. And the reason why this is growing is that airports and railways would prefer to depend on one company to run all those outlets.
So, if you go an airport, and you see an M&S Food or a Starbucks, it's likely that that outlet will be run by SSP and not by the brand itself. And the reason that's good for the airport or the railway station is for security. So, they would rather have one company vetting with the staff and managing all the deliveries. So, it's much safer for them.
And also, there's going to be a big increase in global travel. I think particularly in the Middle East and Asia we think perhaps there's going to be a 6% increase in passenger numbers every year from now until the year 2040. So, lots of new airports and railways and hopefully, lots of scope for SSP to tender for new business.
Wall: And is this very much a domestic-focused stock? I mean, there are plenty of railways and airports in the U.K. for them to grow into, but do they have their sights scoped on sort of global domination?
Winter: Definitely. So, they are very established in Europe. But where we think the opportunity is, is in the U.S. So, in the U.S., I think about 70% of outlets in railways and airports are run by independent brands. So, there is a lot of scope for SSP to expand and take over some of those independents.
Wall: Rachel, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
