To make good stock de­ci­sions, con­sider a global per­spec­tive

The Washington Post Sunday - - ON THE MONEY - BY AN­DREW TANZER

Den­mark

Peter Baughan, co-man­ager of Hard­ing Lo­evner Global Eq­uity, iden­ti­fies firms that can tap into long-term-growth themes. Sad to say, he’s found one such theme in di­a­betes, a dis­ease that is grow­ing world­wide. His play on this scourge caused by mod­ern di­ets and life­styles is Novo Nordisk, the leader in di­a­betes care, with just more than half of the global mar­ket for in­sulin.

Un­like its di­ver­si­fied com­peti­tors in the syn­thetic-in­sulin busi­ness (the U.S.’s Eli Lilly and France’s Sanofi-Aven­tis), Novo Nordisk ben­e­fits from its laser­like fo­cus on di­a­betes. It plows 15 per­cent of sales each year back into re­search, which gen­er­ates con­trap­tions, such as pen­de­liv­ery sys­tems for in­sulin, and new drugs, such as Vic­toza, a once-a-day in­sulin shot that, as a pos­i­tive side ef­fect, pro­motes weight loss.

Ja­pan

Thanks to glob­al­iza­tion, U.S. in­vestors pay at­ten­tion to China’s vo­ra­cious ap­petite for oil and other com­modi­ties, and we grow anx­ious when Europe’s debt mar­kets go hay­wire. Bor­ders are be­com­ing less im­por­tant when it comes to stocks too.

“Where a stock is listed is be­com­ing al­most ir­rel­e­vant,” says Sarah Ket­terer, co-man­ager of Cause­way Global Value Fund.

At Cause­way and other in­vest­ment firms, an­a­lysts who have spent their ca­reers fol­low­ing U.S.-based drug mak­ers or banks or air­lines are now look­ing for the most-com­pelling firms at the most-at­trac­tive prices all over the world.

“ To make good stock de­ci­sions, you’d bet­ter have a global per­spec­tive,” says Bob Turner, co-man­ager of Turner Core Growth Fund.

What mat­ters, says Ket­terer, is not where a com­pany has its head­quar­ters but where it gen­er­ates its rev­enue and profit and where fu­ture growth op­por­tu­ni­ties lie. For in­stance, to­bacco gi­ant Philip Mor­ris In­ter­na­tional is based in New York, but it gen­er­ates 100 per­cent of its sales abroad. Teva Phar­ma­ceu­ti­cal, the world’s biggest seller of generic drugs, is based in Is­rael but books most of its sales in the United States and Europe.

We have as­sem­bled stocks — based in the United States and over­seas — that are global lead­ers in their in­dus­tries. In ad­di­tion to look­ing for strong prof­itabil­ity, fi­nances and man­age­ment, we sought com­pa­nies with bright long-term-growth prospects — which in sev­eral cases stem from high ex­po­sure to emerg­ing mar­kets. Fi­nally, we fo­cused on stocks that may not be cheap but are at least trad­ing at prices that ap­pear at­trac­tive rel­a­tive to the com­pa­nies’ com­mand­ing mar­ket po­si­tions and long-term busi­ness prospects. All of the for­eign stocks trade in the United States as Amer­i­can de­posi­tary re­ceipts. Prices and re­lated data are through Dec. 3.

Canon, a world leader in prin­ters, copiers, high-end cam­eras and semi­con­duc­tor-mak­ing equip­ment, ex­em­pli­fies Ja­pan’s prow­ess in pre­ci­sion en­gi­neer­ing and prod­uct minia­tur­iza­tion.

Canon gen­er­ates about 80 per­cent of its sales out­side the mori­bund Ja­panese econ­omy. And Rob Tay­lor, co-man­ager of Oak­mark Global Fund, likes that 30 per­cent of Canon’s rev­enue comes from roy­al­ties (for ex­am­ple, ev­ery Hewlett-Packard laser printer uses Canon technology) and prod­ucts, such as ink car­tridges, that cus­tomers buy re­peat­edly. Canon has $9 bil­lion of cash on its bal­ance sheet and no debt. And it has been re­pur­chas­ing shares — un­usual for a Ja­panese com­pany.

Ger­many

Siemens, a lum­ber­ing gi­ant no more, com­bines su­perb Ger­man en­gi­neer­ing with ruth­less, Amer­i­can-style cost cut­ting to rise as a for­mi­da­ble com­peti­tor.

Siemens’s de­ci­sion to cut head count, close plants and exit weaker busi­nesses in which it’s not the No. 1 or 2 player ac­cel­er­ated af­ter Aus­trian Peter Loescher be­came chief ex­ec­u­tive in 2007. “Loescher makes changes, not ex­cuses,” says DavidMar­cus, man­ager of Ever­more Global Value Fund.. Pro­duc­tiv­ity and profit mar­gins are surg­ing, and earn­ings are way up de­spite only mod­est growth in sales.

Siemens is a global force in cap­i­tal goods, such as in­dus­trial-au­to­ma­tion, power-gen­er­a­tion and trans­porta­tion equip­ment. In the quar­ter that ended Sept. 30, for ex­am­ple, the com­pany landed or­ders to sup­ply Am­trak with 70 lo­co­mo­tives and to build a steel mill in Brazil and a power plant in In­dia. Siemens also has im­por­tant busi­nesses in med­i­cal equip­ment, auto elec­tron­ics and light­ing. Over the past five years, rev­enue from emerg­ing mar­kets has risen from 19 to 30 per­cent of to­tal sales (Ger­many ac­counts for only 15 per­cent of Siemens’s busi­ness).

Switzer­land

When you mix Asia’s rapidly spread­ing af­flu­ence with the re­gion’s cul­tural affin­ity for brand-name lux­ury goods, you have a mouth­wa­ter­ing recipe for Richemont, owner of such well-known lines as Cartier and Van Cleef & Ar­pels jew­elry, Pi­aget watches, Mont­blanc pens and Al­fred Dun­hill leather goods. In the first half of Richemont’s cur­rent fis­cal year, which ended Sept. 30, the firm’s Asia-Pa­cific sales ex­clud­ing Ja­pan surged 50 per­cent, to 36 per­cent of to­tal sales (Ja­pan ac­counted for an­other 11 per­cent of rev­enue). In fact, the com­pany has strug­gled to keep up with brisk de­mand for its watches and jew­elry.

Con­trolled and run by Jo­hann Ru­pert, a low-pro­file South African bil­lion­aire, Richemont es­tab­lishes a re­tail pres­ence for brands such as Cartier wher­ever wealth is minted. Win­ter­green Fund’s David Win­ters says that Richemont’s ac­count­ing is ex­tremely con­ser­va­tive, and he ex­pects earn­ings, which are un­der­stated, to climb at an an­nual rate of about 15 per­cent for years to come.

United States

Schlumberger, a maker of drilling and well-test­ing equip­ment and the world leader in oil field ser­vices, looks to­ward a bright fu­ture. De­spite fee­ble eco­nomic re­cov­er­ies around the world, de­mand for oil has perked up, and the price of crude has re­bounded to about $85 a bar­rel. Credit the in­sa­tiable thirst for oil from emerg­ing mar­kets such as China, where an­nual car sales have mul­ti­plied ten­fold in five years.

Oil is get­ting harder to find and more ex­pen­sive to de­velop. The In­ter­na­tional En­ergy Agency says that half of the oil pro­duc­tion that will be needed by the end of the next decade has yet to be de­vel­oped or found. New sources will come from such hard-to-tap places as deeper off­shore wa­ters and more-re­mote fields.

The Hous­ton-based com­pany gen­er­ates 85 per­cent of its earn­ings out­side North Amer­ica. Those prof­its will soar with an in­crease in ex­plo­ration. An­a­lysts on av­er­age ex­pect Schlumberger’s earn­ings to surge 37 per­cent in 2011 and to mount by 17 per­cent an­nu­al­ized over the next three to five years.

3M, best known for its con­sumer brands such as Post-it Notes and Scotch tape, is hard to cat­e­go­rize. The St. Paul, Minn., com­pany makes more than 50,000 prod­ucts — in­clud­ing ad­he­sives, drug-de­liv­ery sys­tems, touch-screen sys­tems and high­way signs.

What the di­verse busi­nesses share are a cul­ture of sci­ence, prod­uct in­no­va­tion, large li­braries of pa­tents — and high prof­itabil­ity. The com­pany’s op­er­at­ing profit mar­gin of 23 per­cent is ex­cep­tional for an in­dus­trial en­ter­prise, and its re­turn on eq­uity is con­sis­tently above 25 per­cent. Born in 1902, 3M op­er­ates in 65 coun­tries and pro­duces two-thirds of rev­enue abroad, half of that from emerg­ing economies. The bal­ance sheet is solid, with cash in the till ex­ceed­ing debt out­stand­ing. Steady 3M has paid a div­i­dend ev­ery quar­ter since 1916.

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