Garry Laurence, portfolio manager of Perpetual’s global equities strategies, recently returned from a trip to Europe during which he visited a large number of companies to assess how markets and trends are shaping their businesses. In this article, Garry shares his insights on Europe, takes a deep dive into a consumer staples powerhouse and visits BMW to check its progress on the road to driverless cars.
A broad view
The European economy remains reasonably healthy, despite concerns about a weakening PMI (manufacturing index) over the past few months, it remains a healthy 54. This is consistent with GDP growth of about 2% for the region, a figure most company management teams agreed with.
In central Europe, industrial companies like Siemens and Atlas Copco continue to experience mid-single digit revenue growth. They are seeing increased demand, especially from sectors benefiting from higher commodity prices. Well managed financial services companies like Julius Baer continue to generate positive net inflows from their clients despite the recent sell off in European financials.
Mediterranean countries are still recovering from the global financial crisis. Spain continues its recovery with Banco Bilbao Vizcaya Argentaria generating mid-single digit loan growth for the SME segment, and it expects mortgages to return to growth by the end of the year. NH Hotels is seeing improving occupancies in Europe and has been increasing room rates to drive growth. In Spain, room rates are 3% off the 2007 peak levels.
UK consumer businesses are performing better than the market would have expected following the Brexit vote. A good example is Britvic; it has an impressive management team led by CEO Simon Litherland. Despite the introduction of a sugar levy in the UK, Britvic is growing, with an increase in Pepsi Max revenue more than offsetting the decrease in Pepsi sales. The unseasonably warm weather in the UK has resulted in retailers enjoying good sales. Britvic continues to take share with Pepsi Max in the on trade, where it has a much larger market share. It’s also winning more contracts in foodservice such as Subway and has seen its Robinson's brand return to growth.
Deep dive – Nomad foods
One of the companies Garry visited was Nomad Foods (Nomad), one of Perpetual’s holdings. According to Garry, the management team at Nomad continues to impress under the direction of Stefan Drescheemaeker. Nomad has strengthened its market share in the UK frozen foods market, holding around 20% market share. It’s slowly being re-rated by the US market as word gets around that they’re building a European foods powerhouse.
As a consumer staples business, it’s expected to perform well when economic growth eventually starts to weaken. Perpetual believes Nomad has the right structure and fundamentals to grow its earnings and share price over the next decade.
Perpetual was initially drawn to the business by its heavily discounted valuation multiple relative to its peer group. Early on, when Perpetual first invested, the stock was trading at only 10x earnings because the market was giving the management team no credit for being able to grow the business. There was also a lack of awareness about the business as only one or two investment banks covered the stock – with so many stocks to cover, it’s not uncommon to discover global businesses that are under researched and consequently mispriced by the market.
Perpetual looked through the history of the businesses and quickly realised that some previous market share losses and underperformance were due to strategy issues. Garry spoke to the previous CEO of the business, buying managers at their larger retail customers, and senior management of several competing businesses to gain a better understanding of the potential outcomes from the new CEO’s strategy of refocusing on the core business and ‘must win battles’.
It was apparent the actions being taken to re-invigorate the core brands made perfect sense and would accelerate sales growth. The fruits of these actions are becoming evident, with organic revenue growth of 3% in the last quarter and operating earnings growth of 16%.
Nomad has moved from being about turning around underperforming brands to one which is on a firm footing where core brands are delivering. It has recently been on the acquisition trail in the UK, purchasing Aunt Bessie’s and Goodfella’s. These brands are the leaders in frozen Yorkshire puddings, potatoes and pizza in the UK; strategically important as it increases Nomad’s UK frozen foods market share to 20%, which in turn increases its bargaining power with core retail customers.
Driving lessons in Munich
Garry had the opportunity to spend valuable time at BMW's autonomous driving headquarters, an hour out of Munich. While Perpetual is not an investor in BMW, it does invest in Aptiv, one of BMW's main parts and service providers. Aptiv is helping BMW to build out its portfolio of electric vehicles and move up the stages of autonomous driving cars (interestingly, Aptiv has recently launched a fleet of 30 autonomous vehicles in Las Vegas on the Lyft network, a competitor to Uber).
There is a five-stage framework that dictates the levels of autonomy that will emerge over the next decade before ‘every day’ cars become completely driverless. Change will advance from Level 0 (manual driving) to Level 5 (full automation). Presently, the most advanced cars are at level 2 autonomy, where a car provides partial driving assistance and might automatically brake if it senses a collision. The current BMW 5 series has 23 sensors in the car with cameras, lidars and radars.
The next stage of autonomy will be level 3, where the driver will be able to take a break from driving and, after sufficient warning, the car will signal to the driver when they need to take over driving. HD mapping will be added to vehicles on top of cameras and sensors.
Level 4 is the stage of robo taxis where you will still need the driver in the car, but the car should effectively be able to control the vehicle. BMW expects to get to this level by 2025.
Level 5 is full automation. Obviously completely autonomous driving is dependent on governments having the confidence to regulate in favour of it.
BMW believes that each manufacturer will continue to differentiate on features within a vehicle and that brands are important. Either way, we believe Aptiv will be a strong beneficiary of the transition to autonomous driving.
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