To make good stock decisions, consider a global perspective
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.
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.
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).
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.
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.