Cédric de Fonclare, manager of the Jupiter European Opportunities SICAV fund explains why Johnson Matthey, Nokia, Tenaris, Pandora and Ryanair can currently be found in his portfolio.
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Johnson Matthey Don’t throw the baby out with the bathwater
Nokia The comeback kid
Tenaris Still plenty in the pipeline
Pandora Why it can pay to open Pandora’s box
Ryanair Clipping the wings of its rivals
When negative sentiment around diesel engine technology hit a peak with the Volkswagen emissions scandal, Johnson Matthey got caught in the slipstream as investors in seeming indiscriminate fashion punished any company operating in this sector. For us, the slump in Johnson Matthey’s share price, a leading manufacturer of catalysts and pollutant control technology, offered an opportunity to significantly increase our exposure to the stock, making it one of our largest holdings in our portfolio. The company, in our view, remains structurally, a growth company, with demand for its products only likely to increase as restrictions on CO2 emissions continue to tighten, and further measures are taken to limit the impact of global warming.
The Volkswagen scandal raised questions about the future use of diesel in cars; while over 40% of Johnson Matthey’s profits come from catalysts, the vast majority of that profit comes from the installation of converters in trucks and not light vehicles. The company is very active on the US and European truck market, where the need to refresh truck fleets and upgrade existing trucks to meet tougher emissions standards should drive demand for its products. There are even signs that the European diesel car market is stabilising, another positive sign for the firm. So, too early to sound the death knell on diesel? We certainly think so.
A comeback stock of sorts as this is a company that has returned to our portfolio after a decade in the wilderness. As a rule, we have tended to avoid technology-related companies with a consumer focus, which was the case with Nokia when its main business was selling mobile handsets. These companies are too prone to having their business model undermined by new innovation that can see them quickly displaced as market leader by the ‘new kid on the block’. Today, Nokia is a very much one of the leading telecom equipment makers in the world, and is likely to consolidate that position with its acquisition of Alcatel-Lucent. It operates in a competitive but concentrated sector with Ericsson and Asia-focused Chinese equipment maker Huawei its only true rivals with any scale. While it is true that it is not a high-growth sector, telecom operators have been showing an increasing willingness to spend money on upgrading their networks as the quality and speed of data delivery becomes a commercial argument to attract new customers. Nokia is a direct beneficiary of this trend.
Past performance suggests Nokia is likely to be very successful in achieving the synergies and cost-cutting efficiencies it is targeting from its acquisition of Alcatel-Lucent. We think meeting those targets should create significant value, with the added comfort that the company has a cash war chest equivalent to 30% of its market capital. As an investor, we also like the focus on the shareholder, as evidenced by their dividend policy and their programme of share buybacks. Capital allocation is always approached in a disciplined manner – a sign that the company cares about value creation for shareholders, and refrains from acquisitions for the sake of making them. While there is some volatility around the share price, in our view this is far outweighed by its current attractive valuation.
Tenaris operates in the oil and gas sector where we have been structurally underweight. The company is a leading producer of drill pipes that are used to extract oil from the ground. These pipes are essential, and while demand may vary with the price of crude, demand will always be there. Profits may not be what they were when oil was at $100 a barrel, but the current share price seems to be discounting the idea that profits could ever return to those previous levels, and will stay at their current low base. We do not believe this to be the case. We added Tenaris to our portfolio in February this year, when the share price was really struggling amid negative sentiment on the outlook for oil and gas prices. We now see oil at $50 a barrel, with a resulting positive impact on the company’s shares. Tenaris though wouldn’t make it into our portfolio if it was just a play on the price of crude. We like the way the firm is conservative about its capital allocation; it shows good discipline. In addition, it is probably the only company in its sector which has over $1bn net cash on its balance sheet. All this together means the family-owned company is in a good position to maintain its long history of paying dividends to shareholders while it should also have enough money in the bank to survive dips in the cycle, when others are struggling.
Greek myth might urge caution when opening Pandora ’s Box but there are solid reasons why you will find this Danish retailer of the same name has been in our portfolio for over three years. The company operates in a very fragmented industry and has successfully positioned itself as a supplier of affordable but high-quality jewellery, largely as a result of its popular charm bracelets. This is a very high margin, cash flow generative business, which is growing very strongly in the US and across Western Europe, notably in the UK and Germany. Unlike other retailers, it is achieving this success without having to spend a large amount of money on marketing and advertising, helping keep profit margins healthy. At the same time, it is only just beginning to tap into the potential emerging markets are likely to offer. This opportunity is likely to provide a whole new source of revenue and profit growth in the future. Geographic diversification is being accompanied by product diversification: the charm bracelets continue to sell well but the retailer has now branched out into rings and pendants. These new jewellery items appear to a younger demographic, helping Pandora widen its customer base. It’s an attractive package, further embellished by the fact that it trades at a significant discount to other successful retailers such Inditex, owner of Zara. To our minds, we are getting a high-growth business at a decent valuation that offers a decent cash return to shareholders, via dividends and share buybacks. Occasionally we may take a little profit off the table to protect ourselves from the possibility that a failed product launch or changing fashions might harm Pandora’s outlook but the company nevertheless remains a core holding.
A discount airline company that needs no introduction for many, but one we believe will continue to outperform its low-cost peers as well as traditional legacy airlines. Ryanair, in our view, is particularly good at taking advantage of dips in the cycle to buy and/or lease new aircraft from Airbus and Boeing on favourable commercial terms. They know when to exercise their buying power at the right time. In recent years, we have seen a uniformisation of the fleet; instead of owning a number of disparate aircraft, they have concentrated their efforts on a few key models making the fleet easier to maintain from a cost perspective. It’s also a young fleet meaning fewer repairs. All these elements combine to give Ryanair a cost leadership advantage over its rivals. Meanwhile, Ryanair, in common with the rest of the airline industry, is able to profit from the long-term trend of rising passenger traffic. The number of people taking planes has been growing close to 5% year after year, well ahead of overall global GDP growth. In short, the airline company, in our view, is in something of a “sweet spot”; it is operating in an industry where there is good growth, it is a very strong cash flow generative business and it is highly profitable. Furthermore, we believe the company should continue to win market share from its rivals, as they operate on a number of routes where they have little or no competition. On the one concern related to public perception of the brand, Ryanair has made great efforts to improve the customer experience for those who use its services. The website, for instance, is much more user-friendly, and while there is still room for improvement, we believe the company has taken the right steps to address concerns and turn this into a legacy issue.
Cédric de Fonclare , July 18
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