Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Ian Mortimer, Manager of the Guinness Global Innovators Fund, to give his three stock picks.
Hello, Ian.
Ian Mortimer: Good afternoon.
Wall: So, what is the first stock pick today?
Mortimer: The first stock pick today is Lam Research, a semiconductor company we bought at the end of last year. So, this is a business that does the etching, if you like, for kind of creating these sort of circuitry, if you like, on silicon wafers. They also do other things in terms of efficiencies of that design.
It's an interesting company in that it has lots of sort of Asian clients. So, they have things like Samsung, things like sort of Taiwan Semiconductor. But what we quite like about not only just the business but we also like sort of the secular theme as well. So, what we recognise is there's a lot of questions around valuations in IT.
Within the semiconductor space there, we see this is an area that's actually still offering quite good value. I think there's a question mark that maybe it's offering good value because it's a very cyclical sector and maybe we are at the top of that cycle. So, therefore, it deserves lower multiple.
However, we believe that actually these companies are really growing their earnings quite significantly and actually deserve a higher multiple and that maybe that cyclicality, maybe the trough won't be as deep this time because the trends we are seeing markets in terms of the demand for the number of semiconductor chips, whether it's through driverless cars, whether it's through the Internet of Things or whether it's just the density of chips in some of these devices as well.
Wall: When you are investing in a stock like this, how much do you have to be an absolute tech geek and how much of it is just about reading the balance sheet?
Mortimer: I think it's a bit of both. We don't take a view whereby we are putting ourselves as experts in semiconductors necessarily and we like to, yeah, really focus on the numbers and as you say, sort of strong balance sheets. We like to see good cash flows. And ultimately, we are trying to use sort of the idea of, as I say, those sorts of more secular trends to try and get a feel for how this company could grow and then taking our sort of – putting our valuation hat on, if you like, to make sure we are not paying up too much for that.
Wall: And what's the second stock pick today?
Mortimer: Our second stock pick today is Boeing. So, again, it's sort of slightly more interesting one in terms of how we think about innovation. So, this is obviously a sort of the airline manufacturer in the industrials space. So, we don't just look at technology stocks.
What we quite like about this company is not only it is again in a quite a good secular growth trend. So, there's more and more sort of demand for aircraft, particular narrow body, both in Europe and Asia. But also, what we quite like from a technological point of view or an innovation point of view is how the efficiencies they are driving in terms of their automation.
So, today, they can make their 737 aircraft in 9 days, which is a huge reduction from where it was before on their rolling platform. They have a whole new factory in Seattle just making wings for aircraft. So, that really increases the efficiencies. So, that's really driving down costs, particularly through labour.
They are also using innovative things such as sort of additive construction or 3D printing to make some of the sort of noncritical parts for their airline. So, what we are seeing with this business is a sort of secular growth trend driving down of efficiencies. And so, now we've got to the point where this is really a kind of cash flow growth company.
We are expecting next year up sort of $15 billion of operating cash flows and we think they have also got a benefit from maybe some of the tax benefits we are seeing in the U.S.
Wall: And how dependent is an aircraft business on global economy? Because we had fantastic conjoined growth across the world last year, but that can't go on forever. If we do see a dip, as we have done in U.K. GDP over the last week, does that impact airline businesses?
Mortimer: Yeah, absolutely. I mean, it will be a part of any – and most businesses really will be affected by kind of GDP growth, and we'd expect the airline manufacturers will be part of that. However, we are not trying to necessarily predict where we are in that cycle. From what we can see today, they've got a strong backlog. I think they have got almost seven years' worth of production as their backlog. And so, therefore, we feel pretty confident that even if there's a sort of slight slowdown globally, this is still actually a pretty solid business.
Wall: And what's the third and final stock?
Mortimer: The final stock I've got is another company in the semiconductor space which is NVIDIA. So, a very popular stock, I think, with a lot of people. It's actually one we've owned for over a decade in our strategy, so we've been quite early on. And again, really kind of interesting business that has a very good core business.
So, it's making the graphics processing units and sort of started off with PCs particularly for gaming. And they've taken that idea and they are really driving into some of the sort of fastest-growth areas of the market. So, they are doing incredibly well using their chips and sort of the new AI technology and datacenters. They are right up there in terms of things like driverless cars and they are being used by some of the largest tech companies out there, whether it'd be Microsoft or it's Amazon or it's Google.
And what's also interesting from an investment point of view is although this is a more expensive stock, we are seeing earnings that could potentially double between 2017 and maybe 2019, so in a very short period of time. And also, they are driving efficiencies. So, actually, their operating margins are expanding. So, not only is their top-line growing very, very quickly, that's also coming through sort of leverage, if you like, onto their bottom-line, too.
Wall: Ian, thank you very much.
Mortimer: It's a pleasure. Thanks for having me.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
