Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Zehrid Osmani. He's manager of the Martin Currie Global Portfolio Trust (MNP).
Hello.
Zehrid Osmani: Good morning.
Black: And you're going to tell us about three stocks in the portfolio that are quite interesting at the moment. Where would you like to start?
Osmani: Sure. Well, we can start with one of our strong picks, which is Ferrari. Ferrari is a company that doesn't need introducing. It's a very strong brand, very recognisable. What we like about the stock is both its brand equity, which feeds into strong pricing power, has got high barriers to entry, because it takes decades to build this type of brand. So, the brand equity is very high. It's got very attractive growth profile in terms of opening the market to emerging markets in particular, where it's still underrepresented. And it's got a very attractive returns profile. If you think about the auto sector globally, the return on invested capital of that sector is in the region of 8%. And here is a company that's generating a ROIC of 25% plus, that we foresee to be going into the mid-30s over our forecast period.
So, very attractive returns, very attractive growth profile, which we estimate to be in the low teens at the top-line and in the mid to high teens in terms of profits. And where they're getting that from is volume growth, but also pricing power. When you're looking at some of the products that they're introducing, one of them is a limited edition that they're calling the Monza is 500 units, which have all been pre-sold at a price in the region of $2 million each. So, it tells you that the scarcity value of this product makes the demand even stronger. And this limited edition will be very profitable.
Black: And something is – at the moment, people are worried about the auto sector if there's a recession. I'm guessing if you're selling a $2 million car, you're not that worried about recession, and what that might do to your customers.
Osmani: I suspect that all these clients have put an order through will not retract because if they do, they'll lose what is, in their mind, a very valuable long-term investment proposition because they expect that car to revalue. The other exciting thing is, when we talk to the management of Ferrari, and we talk about this pricing power, they very much understand the opportunity to regularly launch a new limited edition, maybe every four to five years, which will give them that ability to really price up those products and generate high returns on these special editions.
Black: Okay. What's stock number two?
Osmani: Stock number two, we'll go with an industrial one, which is Hexagon, which is a company that effectively plays into the automation and the robotisation of the industrial production and is able to effectively offer precision instruments that increase the productivity of production lines, in particular, and has got a strong offering on the software side. They've been increasingly moving their software content, which increases the visibility of their revenues, but importantly, increases their potential for returns. So, higher margin services effectively.
Black: And I'm guessing this is an area where once you prove your worth as a company, you keep that contract because you can't get it wrong.
Osmani: That's absolutely right. So, whilst it's a cyclical company, because the industrial cycle is cyclical, over the long term this company, we think, will be a winner in its space.
Black: And what's our final stock?
Osmani: The final one we're going to go with will be Moncler, and Moncler is an interesting one. It's effectively an apparel company in the luxury end of the space. It's a bit of an unusual company in that it's still very much underexposed as a brand. So, there's still a lot of Greenfield opportunity for space growth, which could be in the high single digit over the next couple of years, which will drive the top-line. But they've also got some element of positive mixed effect as well that we foresee over the years to come. And importantly, it's one of these brands where the CEO/effectively creative director, as well as a management team are very protective of their brand.
So, they're making sure that inventories are managed very carefully, they're making sure to not over-expand the brand overextend it and therefore their pricing power is remaining very strong. Not having too much inventory clearly keeps the returns high. So, this is a company that has got a return on invested capital in the 40s. And we foresee that to be improving all the way to the 60% level on our forecast period. So, again, very high return company.
Black: It must be a hard balance for companies. They want to grow their profits and their revenue. But also, if you're everywhere you lose that – the specialness that makes you the luxury brand.
Osmani: Totally. So, it is a balancing act and Remo Ruffini, the CEO of the company, understands it very well. And that's why I used my words carefully when I said he's very protective of the brand. He just wants to make sure that the brand is exclusive, stays exclusive, its pricing power stay strong.
Black: Well, thank you so much for your time.
Osmani: You're welcome.
Black: And thanks for joining us.
