Emma Wall: Hello, and welcome to Morningstar. I’m Emma Wall and here with me today is Killik & Co's Rachel Winter to give her three stock picks.
Hi, Rachel.
Rachel Winter: Good morning, Emma.
Wall: And what's the first stock you'd like to highlight today?
Winter: The first stock today is a defence company called Northrop Grumman (NOC), mainly based in the US, and we think defense spending is quite topical at the moment. So, Trump has been very vocal about the fact that many member countries of NATO are not spending enough on defence. They are supposed to be spending about 2% of gross domestic product, but many countries are spending well below that. For example, Germany is barely spending 1%. So, Trump is quite annoyed about that. And he's really trying to up the amount that NATO members spend on defence.
The US is spending about 3.6%. So, well-above the target, but Trump is really trying to push that target to 4%. So, it really does seem as though global defence spending is set to rise and it's a sector that we like very much at the moment. And the reason we've picked Northrop Grumman in particular is it is very much US-focused. And it's also quite diverse in terms of the types of defence it focuses on. So, it's quite exposed to the more traditional types of defence such as strike and it's also exposed to areas such as cybersecurity and satellite protection. So, it's quite a diverse business and it's in a very much a growing market. So, we think it looks very attractive at the moment.
Wall: And how dependent is that stock on the US economy? Because opinion is divided as to how far the US economy will grow in the near future.
Winter: It is. Well, about 85% of their revenues come from the US government. So, a very high proportion is dependent on the US. But I think it's fair to say that people are quite concerned about how far behind NATO has fallen in recent years in comparison to countries like Saudi Arabia and China, which have really increased their defence spending. So, I think although defence is a bit of a divisive issue, I think people would feel a bit more comfortable to see the US and the rest of NATO spending a bit more.
Wall: And what's the second stock pick today?
Winter: The second one is a Danish company called Orsted (ORSTED). Now, this is one of the leaders in renewable energy. And we really think that renewable energy is becoming much cheaper. It's really declining cost over the last few years and now it's really been taken a lot more seriously than perhaps it was previously. So, just looking at UK power generation, for example, we now get about 30% of our power from renewables and about half of that third comes from offshore wind. So, really, it's quite a significant proportion of UK power generation.
So, Orsted, the company that we've been looking at, yes, they are Danish, but about 46% of their revenue comes from the UK. And they actually believe that offshore wind capacity will grow by about 26% per year for the next eight years. So, the growth potential here really is quite high and Orsted is one of the major players with good economies of scale. So, we think it's a very attractive company in what is very much a growing market.
Wall: What is your third and final stock pick?
Winter: The third is a company called Givaudan (GIVN). It's a Swiss company and it produces ingredients for flavours and fragrances. And it actually has about a 25% market share of this flavor and fragrance markets. Now, the reason we're looking at this is that we've been looking at the UK High Street and thinking what types of companies are going against the decline than actually doing quite well? And one of those is home fragrance.
So, companies making this luxury candles and luxury diffusers, they are really doing incredibly well. And you see companies like Jo Malone, Molton Brown, they are really thriving despite the fact they charge you £60 for a candle. So, they're also doing incredibly well. And rather than investing directly into those companies, we're looking at the companies making the raw ingredients. So that's Givaudan. They are doing incredibly well. They think that the demand for essential oils, which they make, is growing over 8% per year.
And one thing that we like about them is that raw ingredients have to be grown to order. So, that means that these fragrance companies have to order their suppliers many months or even years in advance. So, therefore, companies like Givaudan have quite good security over future revenues.
Wall: Now, you've mentioned a few big brands, though. What would happen to the stock, say, one of those big clients, those big customers like Jo Malone cancel the account? How dependent is the company on these individual clients?
Winter: To be honest, I love these major brands, like Jo Malone, like Molton Brown. They do keep their suppliers quite confidential. So, it's quite difficult to say, but what we know is that Givaudan is a major supplier and it's worth about 25% of the market. So, I'd like to think they do have a vast range of customers, and if they want to lose one, it wouldn’t be overly detrimental to their overall revenue.
Wall: Rachel, thank you very much.
Winter: You are welcome.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
