Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Michael Field. He is an equity analyst at Morningstar. Hello.
Michael Field: Good morning, Holly.
Black: So, you've got three stocks for us today that you quite like and they all have a narrow economic moat, which is quite an important attribute for companies for you analysts at Morningstar. So, where would you like to start?
Field: Yeah, exactly right, Holly. So, I think first up, a company that we've looked at for a long time and very much like, Sodexo, a company that people may have heard of. They are basically one of the largest catering companies globally. They operate cafeterias in business, universities, hospitals, et cetera. So, it's a name something we're familiar with already.
Obviously, in this time, I think the first thing people will think of is, well, that's a terrible idea. These companies are getting really badly hit by the coronavirus and the impacts of that and that's completely right. They are indeed getting hit. Certainly, with a lot of businesses being locked down and universities being completely closed altogether, the companies are seeing hugely reduced volumes there. So, that's the kind of negative on the story. But the good news for investors is that the share price has actually fallen off by about 50% from kind of the high to the low point over the last couple of months. So, from that perspective, we see very much an opportunity. And on that I think while people might look at it now and say the next three months you're going to be pretty ugly, looking longer-term, the company is actually quite resilient. A lot of its exposure is while in high-end businesses like this, it also has exposure to things like hospitals and mining and oil and gas rigs and areas that aren't going to be hit as badly or may actually see increases over the next few months as a result.
Black: And presumably it spreading across different sectors kind of allows it to recover a bit more quickly when this is over because it's not just relying on those schools and universities.
Field: Completely right. I think diversity is key. And also, being asset light and being nimble is also a very strong point of the company is that they don't physically own very many properties or anything like this. So, if things shut down, they can move around and they can also move staff around quite quickly.
Black: And what's stock number two?
Field: So, stock number two is a similar theme, Bunzl, the U.K.-listed company. Again, it falls under that kind of catering bracket. This is a company that people probably wouldn't have heard of as much. They are a huge supplier of non-food consumables which is kind of a nondescript word but essentially they supply everything from disposable forks and knives to cleaning supplies, safety equipment and PPEs, something that's quite pertinent at the moment, which all sounds very kind of dull and boring. But the point is, this is the only company globally that does this on this whole scale.
Black: And having that personal hygiene PPE side of the business must be a fantastic tailwind at the moment?
Field: It is, I think, making some hay in the midst of a terrible situation. What I would say is that it's a relatively small part of the business and probably not going to compensate for the lost volumes in other areas.
Black: Okay. And what's our final stock?
Field: So, last up is a completely different theme, so Bureau Veritas, a French-listed testing company. So, it's one of only three globally-diversified testing companies, and it's a company that many people again might not have heard of, but they test everything from cloths, to elevators to oil rigs. It's hugely diverse from that perspective. And on the similar theme to what we've looked and we've discussed just now, again, it's a very asset light business, a very nimble business. They had a lot of oil and gas exposure going into 2016 (indiscernible) and because a lot of their staff are contractors, they were quickly able to bring on new staff in other areas and cut costs quite quickly in the areas that are affected. So, that's where we see the kind of advantage of this stock.
Black: And how does it earn its moat?
Field: So, essentially, it earns its moat from kind of switching cost argument. So, we believe that this company and the testing that do is highly embedded in their clients' processes. So, again, we spoke about client retention rates for Bunzl and this is a similar story that the client retention rates here are 90% plus. So, once you are a client of this company and using them to test your products, so what you have – you know, your services, et cetera, it's very difficult to actually replace them with someone else. They know exactly what they are doing. They know the staff; they know the processes and it's a lot of asking for you as a client to get rid of them with very little benefit of doing so.
Black: Michael, thank you so much for your time. For Morningstar, I'm Holly Black.
