Holly Black: Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me is Ben Peters. He is manager of the Evenlode Global Income Fund.
Hello.
Ben Peters: Hello.
Black: So, we're talking about three stocks in the portfolio that you're excited about at the moment.
Peters: Yeah.
Black: Where should we start?
Peters: Let's start with EssilorLuxottica (EL). A bit of a mouthful. I'll shorten it to Essilor. But it's actually formed by the merger of a French company Essilor which makes lenses for glasses with an Italian company Luxottica, which is the global market leader in eyewear frames and particularly sunglasses. So, brands like Ray-Ban, Persol, and Oakley, if you're into sports. So, two market leaders in what they were doing in slightly different parts of eyewear and bringing those companies together has been an interesting development in the last year or two.
Black: So, what's particularly appealing about that company for an income investor?
Peters: Well, both companies, before they merged, were dominant in their niche and that's led to very attractive cash flow characteristics which back a dividend can grow through time. By bringing the companies together they can have efficiencies in their operations in sourcing and that sort of stuff. But also, they can have efficiency in their sales. So, previously, about 30% of Luxottica's frames would take prescription lenses from Essilor. They want to increase that proportion to 60% to give more choice to the consumer and be able to sell through different channels like opticians – so Sunglass Hut which Luxottica owns.
Black: And I guess having these brands like Ray-Ban and Oakley, that sort of makes this less cyclical because they are staples for anyone looking for good eyewear.
Peters: Yes, and they are in that sort of little luxury. They're not the cheapest thing you might buy. But they're certainly not in the class of, say, buying a car. So, you can have that nice feeling of buying something that is of high quality, has that brand that you know and you trust, but doesn't sort of break the bank.
Black: Super. What's stock number two?
Peters: So, the second stock I'd like to talk about is a German industrial and consumer company called Henkel (HEN). About 20% of the business is in beauty, in particular in haircare with Schwarzkopf hair products. But a third of the business is in detergents, like Persil, they are in the Persil brand, and about half of the businesses in glue, adhesives…
Black: That does not seem to fit.
Peters: Yeah. So, it's a slightly odd combination but the consumer parts act as a sort of relatively uncyclical sorts of cash flows and the adhesives part where it does have consumer brands like Loctite and Pritt stick which we will be familiar with from our childhoods.
Black: Okay. I take it back. Yeah, fair.
Peters: Yeah. But actually, most of that businesse in industrial adhesives. So, for applications like in automotive or like in creating strengthened wood for construction, and that sort of thing. And those applications, the glue gets very highly specified and designed into the application itself. So, that gives the company a good deal of traction with its customers and a good long-term relationship with its customers.
Black: This is where we make a pun about a sticky customer base.
Peters: I resisted the urge.
Black: Okay. I'm going to move straight on to stock three to stop embarrassing myself.
Peters: Yeah, stock three is – it's another German company actually called Fuchs Petrolub (FPE). Now, it's a specialty maker of lubricants. It's a bit like Henkel's adhesives business. These lubricants get very highly specified into the end application. So, as you might imagine, it's got big applications in the automotive industry, but it's also seen in general industrial and other applications where you need things like high efficiency heat dissipation and that sort of things. So, it's in a very nice space because on the one hand, it's quite a big company, but it competes with the oil majors, but then they're not really focused on lubricants. And on the other hand, its smaller competitors are quite fragmented. So, they perhaps have the scale that Fuchs Petrolub have to service its larger customers. So, it's in a quite nice position.
Black: You seem to have quite a lot of Europe in portfolio and it's not that popular region at the moment.
Peters: Yeah. It's a bit of a region of two halves, I would say. There are those companies which are very, very highly liked in the market and look a bit expensive to us. But actually, there are other companies which for company-specific reasons trade at lower prices and we can find a room for those in the portfolio.
Black: Well, thank you so much for your time.
Peters: Thank you.
Black: And thanks for joining us.
