At the Morningstar Investment Conference in Chicago this year, I had the good fortune to moderate a world-stock panel, with three outstanding managers.
We had two value managers and one growth manager, but the debate didn't often break along style lines. On the growth side was Rob Gensler of T. Rowe Price Global Stock. On the value side were Dan O'Keefe of Artisan Global Value and Artisan International Value and Mutual Global Discovery's Philippe Brugere-Trelat. Here are a couple of highlights.
Kinnel: Please tell us about one of your top-five holdings, and how you came to own it.
Brugere-Trelat: We like stocks that are unpopular, too complicated to analyse, or simply got totally overlooked. And it's a Danish-based conglomerate called Moller-Maersk. It's a $34 billion equivalent market cap. It was last year probably the most heavily shorted stock in the European universe. Why? Because it's the world's largest container-shipping company. So, you can imagine how popular container shipping was over the last two years.
Well, that actually was, perhaps, one of the reasons we started to take a look at the company, and what we saw was a very large asset base, which in our view was totally misvalued by the market, who was entirely fixated on their exposure to world trade. And on top of being the largest container-shipping company in the world, carrying 10% of the world trade, Maersk is a very large oil-and-gas exploration and production company.
It is a very large food retailer through every format--supermarket, hypermarket, discount stores--across all of Northern Europe, and it is also the owner and the operator of a very large number of specialised vessels from car carriers to grain carriers, you name it--they are in LNG (liquefied natural gas) carriers. And this is a company, which had been run almost like a private company by a family--the Maersk family--for many, many, many years. This a 100-year-old company--three CEOs over that period of time--and until very recently there were no investor relations operation per se at the company.
So, all these things which makes an analysis of the company more difficult actually got us to work harder, and we saw a very significant, strikingly significant gap between the then current market cap and the true value of the assets. So, that's one side of the equation because you need more than that. You need what I just referred to earlier which is, what could close that valuation gap other than the macro cyclical assumption about when world trade is going to recover?
Well, something unusual happened in the company that got us really to take that investment decision. It was the arrival of a new CEO, who was the first no-nfamily CEO in the history of the company, and somebody we happen to know for having been the CEO of a very large brewing company in Denmark, Carlsberg, which he had restructured quite successfully. The simple fact that he was called by the family to take over the reins at Maersk sent to us a very strong message that a very wide-ranging restructuring was going to take place. And lo and behold, this is happening. Undoubtedly, the price of the stock has been significantly helped by a recovery in world trade, and suddenly every sell-side analyst dusted their file and switched from strong sell to strong buy--that's fine. There is still a hell of a lot of upside in the company.
O'Keefe: I'll just talk about my largest holding, which is a company called Experian. Experian is a UK-based company, and it's a relatively new company to the market. It came as a result of a de-merger between two businesses. It was called GUS PLC in the UK going back several years. And it split off into a retail business and Experian, which is a credit-service information provider that provides credit services, credit information, credit analytics, software--all of these things that go around in analysing the issuance of credit.
And it's a relatively duopolistic market globally, so there's only two global players, Experian and Equifax. And when it came out, the business was not well understood, certainly not well understood by UK investors who are the primary audience. And it's a complicated business. It's difficult to analyse, and it was new. And as the recession started to take hold, nobody wanted to own this company because the immediate reaction is, well, you know, they provide credit reports. Why would I want to own a credit report in a credit crunch?
And the interesting thing is that Experian actually grew its business through the recession, and that's because the business is far more dynamic than just credit reports. As their customers moved from buying credit reports to issue credit or new credit cards, they shifted from new issuance to monitoring credit. They shifted to developing new systems that would help them analyse prospective customers so that they didn't make the bad credit decisions that they made in the past. And meanwhile, as a result of it having a very strong global footprint, it was continuing to grow in markets like Asia and Latin America where it has very strong market share as well. And so, again, the business grew through the recession. It has huge operating margins, huge return on capital, generates a ton of cash flow, and got down to ridiculous valuation of maybe 7 or 8, 9 times earnings, depending upon the day during the recession.
And so, we became very large shareholders of Experian during the recession. The stock prices recovered some, but still you are able to buy a business which is a growth company. To go back to this issue of growth, that is trading at a multiple of maybe 12 times earnings. And if you think about growth, just think about it, during the recession the global economy is shrinking 3% or so; Experian is growing 2%. So, it may not look sexy and exciting, but that's still a growth company.
You have relative outperformance of the economy of 500 basis points, and that means that when the economy comes back, as it is slowly coming back, that differential should withstand, should stand up. And if the economy is growing 2%, 3%, 4%, you're going to have business that can grow its top line high-single digits, and that's why we continue to like it.
Gensler: Well, I'm feeling like I'm going to buy their stocks, but it's going to help their performance. I don't want to do that. I am sorry.
O'Keefe: I'll send you some more information.
Gensler: Yeah. Hey, dumb money is coming in behind, I know.
O'Keefe: I've got 39 others, too.
Gensler: Rolls-Royce is a crossover name. It has global aircraft power systems where there are three players going to two. United Technologies is basically out of it; they are just narrow-body. Rolls' largest competitor, GE, just lost their financing advantage because GE Capital used to finance the hell out of it. GE would always win a tie. Rolls is taking share, and they're going from about a third share of the industry to a little bit more, to probably in the 40s.
In the crisis, the darn thing got down to about 7 times earnings because everyone said, "Well, aerospace, nobody will ever fly again. And oh, by the way, this is a big industrial; nobody will ever buy an airplane again." But what they missed is that it's all about recurring maintenance business on the commercial side.
The defence side wasn't going away, either. They have locked in contracts for three to five years. And they've got a marine business and a very nascent power for power gen systems. But their thrust was growing 7% a year because the install base was growing 7% a year, and even if planes flew less, their earnings were going to be flat.
OK, now it's not at 7 times earnings; it's at 13 times earnings. But this is an industrial that's not going to face competition from China. People are pretending that the East will keep buying, but also you're pretending they are not going to compete with you. And remember globalisation for 20 years was really beneficial, especially in the Western industrials, because they were your customer and they were supply chain. But guess what? They're going to start being your competitors. And the Chinese are not going to put a Chinese engine on a Chinese plane. They're coming out with an airframe soon, a narrow body airframe. So, anyway, I love this 50-year cycle business that is misunderstood, that has great recurring revenues. And guess what? It's only about a 4% grower--OK, and maybe 6%, 7% on the bottom line.
Kinnel: One thing that has been a factor for all of you is that you're willing to take on controversial stocks, and that's helped you to succeed and be different from the rest of the world. So I have to throw out there today's most controversial stock--BP. What are you guys thinking?
O'Keefe: We're looking at it, as you would expect a value investor to do--I mean, the value destruction there has been incredible in terms of the dollar amount of market cap that they've lost. And you have to make some assumptions, if you've lost $60 billion or $70 billion of market cap and how much are they actually going to end up paying out in terms of the liability associated with the spill, and that's very difficult to determine. And I'm not there yet; but fortunately, I don't own it, but I'm looking at it.
Gensler: I sense opportunity, but I'm not saying per se BP. But remember when BP happens, Halliburton, Transocean, Cameron, Anadarko have been (tainted), have gone down a lot, too, for different various reasons--one owns 24%, one is the supplier, etcetera. The whole oil-service industry has come off a bunch because there is the moratorium, and there is a little bit less demand. I think there is a lot of opportunity being created, but I'm not into adding names that I think have high-tail risk, even if it's just individual-tail risk, and use dispersion.
Therein lies the opportunity because you know there are a lot of people like me--they won't buy it because you don't want the tail risk. You're probably going to trade too cheap, but I think it's also in these kind of names that it pays to be a little patient. The political agenda of America is like many places. When the government is poor, they lash out to try to get it any way they can, and I get very nervous about the populism going on, particularly around this name.
Brugere-Trelat: We dipped a toe in BP when the (reduction in) market cap started to be over $70 billion because there comes a time when uncertainties and absolute numbers come into sighting distance of each other. It's a very, very, very small position, well below 30 basis points, and I have absolutely no intention to make it bigger with what I know right now. And the problem with BP is that there is an amazing amount of balls up in the air in terms of cost for cleanup, the fine, the penalties--look at anything you can imagine, (the cost) is still undetermined, and to me that is an acceptable degree of risk to make it a meaningful position. I mean, basically, we put a marker down when we saw that $80 billion: It's a big number; it's a big number, but that's all.
Gensler: Often these kind of names are better to buy on the way up than they are on the way down.
Brugere-Trelat: Yes, absolutely.
Gensler: And, I mean, you don't know if it's the last time it's going down, but you might buy it, quite frankly, 30% higher than here when a lot of the things are cleared up because it will probably trade cheaper than it deserves for a long time once we get past this real uncertainty.
Kinnel: Let's move from something you're kind of lukewarm on to the areas you are excited about, whether it's a specific stock, sector, or region.
Gensler: I'm going out to Asia for two weeks, just this Saturday, and it's funny--this is the growth side. I mean, there is no growth in Japan, believe me. But spending some time in Hong Kong and India and all, and I think that we've consolidated those markets over the last 12, 15 months. They have rallied first off the bottom. They are always expensive.
China is a bit less expensive than India and less expensive than a year ago, but the underlying earnings growth and corporate growth and economy growth have been stellar. And with China trying to slow its economy a bit, I think the markets have at least come off a bit, and I think some opportunities have been opened up. So, I'm just excited for the next week's trip. It's funny, I just went to Moscow, Russia, two weeks ago--and Moscow, it's really always an enigma to me. I go once every few years. And I came back feeling a little more comfortable, and I'm tipping my toe in the water--a couple of consumer names there. Although Russia very much is a levered play on what you think the price of oil is, so it's a lot more volatility that way.
In Europe, there's got to be opportunity; it's just being created; and I think, there's some on the domestic side, not just on the international exporter side. It's a very cheap market. (Cheapest market of) the world is Europe.
Brugere-Trelat: I'm a firm believer that great opportunities arise in times of great crisis. And what's happening in Europe is of great concern in terms of public debt and ability to put it down to reasonable levels, and the impact it's going to have on the region's economic growth. This is a real concern, and that is the main reason why stock markets in Europe are so cheap.
The good thing is that everything has been painted with the same brush, and you have a great number of companies, industrial companies in Europe, which are not European at all. They derive a significant portion of their revenues and profits from other regions of the world which are experiencing much faster economic growth--the US, China, 10% this year; it's not bad. And in addition to that, there is a very nice incremental value creation coming from a weak euro. A weak euro is godsend for Europe industrial companies. It was pretty obvious by everybody reckoning that 1euro at $1.45 or $1.50 was widely overvalued; 1 euro at $1.20 when everybody's budget was done at much higher level is indeed a very big cherry on the cake in terms of sales and earnings because it makes the European companies' product more competitive on the world market. They sell more, and they make more money. So, I think, those companies in whichever sector, capital goods, others, whatever you name it--telephone companies are unusually attractive--they are, they've been punished for the wrong reasons. That's where we're looking.
O'Keefe: I'm going to put on my cynic's hat. Instead of thinking of where is the opportunity amongst the rubble, I'm going to say, "Where is the risk amongst the optimism." Right? And so, I think that's an important component of everybody's--or should be an important component of everybody's--thinking and that is, that we all know that the developed-world economies are having trouble in terms of the fiscal situation with the governments.
So, people ask "Dan, why don't you own more in the emerging markets." And I often say to clients and prospective clients, "Look, it is not all sunshine and roses in China." Yes, the economy has been growing at 10% for many, many years, but I see significant risks building up in that economy that does not necessarily present a better risk/reward in terms of the economic environment than certainly the valuation adjusted opportunities you see in places like Europe and the United States. I mean, China has been on a capital-spending boom without parallel in the history of the world. There are now 1.9 billion square metres of residential housing being built in China right now. And that's in an economy that has residential housing stock not too far from South Korea--about the same as South Korea, a more developed economy, and not too far from Japan.
You've got 660 million tons of cement manufacturing capacity; that's more than the EU, the US, Japan, and Russia combined; and they've got 470 million tons under construction. They just did over the last two years, they lent out of the banking system from a state mandated command/control type mentality $2 trillion; that's equal to the GDP of South Korea, Taiwan, and probably one or two other countries combined. It's a massive amount of money pumped into the economy, and I tell you that $2 trillion of lending is not all going to come good--lot of it's going to go bad. So this idea that if we just rush to the developing world to escape the misery of the United States, I think it's a false sense of hope.
Gensler: If there is one thing that saves the emerging world it's that massively high savings rate. So I'm not saying to be bullish or bearish, but at least versus 20 years ago it's more self-financed than it's ever been, because I agree it's a spending boom that's unsustainable.
O'Keefe: But, do the maths. I mean, there was $1 trillion or less of consumption in China, for example, personal consumption. There is $10 trillion in the US, and there is $10 trillion or $11 trillion in the EU. And what makes up 40% of China's GDP? Exports primarily to the US and the EU. So, the numbers are overwhelming here. Consumption in China can grow, but (they can't) offset the decline in the consumption in the US and EU if our economies are on the no-growth path that we all assume they are.
Russel Kinnel is Morningstar's director of mutual fund research.
