Nine stock ideas from Future Generation
On Thursday, we heard from some of the market’s top fund managers at the Future Generation Investment Forum, with each offering their best stock idea. If you missed it, we have summarised the key points from each presentation below and included a link to the recording. Read on for insights from Magellan, Firetrail, Munro, QVG, WAM, Tribeca, Antipodes, and Paradice.
Starbucks (NASDAQ: SBUX): Global growth on a modest valuation
Rosie Malcolm, Magellan Asset Management
Starbucks is the largest coffee company in the world. While strong in the US, it has a lot more growth potential internationally.
It recently signed an alliance with Nestle, who has #1 market share across all coffee products. Nestle have a great distribution system and are in 190 countries.
“We see a company that can grow their net income at 7-10%, add onto that some buy backs at 3%, and add onto that some dividend yield at 3% giving you a total return of around 15%.”
"Starbucks is also going to return $25 billion back to shareholders over three years."
"Trading on a 24 times P/E multiple, and in the context of the strength and longevity of that growth, a strong brand, and a defensive product, we like Starbucks."
WorleyParsons (ASX: WOR): Trading on just 12 times
The biggest beneficiary of the oil and gas industry investing to maintain its wells is WorleyParsons. It is an engineering firm who rent out their engineers on a dollars per hour basis.
“There are three reasons why I like WorleyParsons, the first is where we are in the cycle. The second is self-help, and the last is its valuation.”
"Over the past few years, their revenue has fallen over 50%. However, the oil and gas cycle is turning. In the past 5 months, they have won more business at any given time since 2013."
“In 2015, they received a gift. That gift was a CFO named Tom Honan. Tom was the former CFO of Computershare and Transurban.” With the cost-out program and the balance sheet repair, we believe WorleyParsons is well-placed to grow earnings as the oil and gas cycle turns... At the moment, valuation is just 12x FY19 PE."
Treasury Wine Estates (ASX: TWE): Could double earnings in five years
"The Food & Beverage industry is undergoing significant structural change – Healthy choices and premiumisation will drive consumer choices in the years ahead. Treasury Wine leads the pack of the Australian plays.
“Most people in Australia will tell you this stock is too expensive…we would say, yes, you might be right in the short-term, but in the long-run, only one of those two companies have a chance of doubling its earnings in the next five years. And that’s Treasury.”
"At under 20x 12 months forward P/E with 20%+ 3 year EPS CAGR, Treasury Wine is our Australian pick."
International Flavours and Fragrances (NYSE: IFF): Five-year growth trajectory
IFF is a beneficiary to industry consolidation. It has high exposure to private label and small-medium FMCG manufacturers and generated 6%-8% revenue growth CAGR for FY19-23.
In terms of operating margins, it has a positive mix and operating leverage, translating into 50-100bps expansion p.a.
Multiple should re-rate to 25x, which equates to 100% upside over a 5-yr. period.
Global Traffic Network (ASX: GTN): A cash flow juggernaut
Tony Waters, QVG Capital
"GTN is a very simple business. They stick a helicopter into the sky or link into someone in the road traffic network and send a traffic report through the radio. They do that for every radio network in the country. They have unparalleled national audience share for an Australian media company (10m + listeners at least once a week)."
"High barriers to entry mean high margins. Australia has 40% margins. Group margins of 26% underlie the margin accretion potential in Canada and Brazil.
"GTN a cash flow juggernaut. It has over 100% conversion. Low ongoing capital investment means growth in future dividends. The recent Rogers Network deal with Canada’s #1 radio network provides a catalyst."
"GTN is relatively cheap versus the average small-cap, trading at 13.4 times, against the small cap average of 15.5 times."
Baby Bunting (ASX: BBN): The 'Bunnings' of baby retailing
"Baby Bunting is the leading baby retailer in the country. It has over 50 stores and is looking to grow its network to over 80 stores. A child is born in Australia every 1 minute and 42 seconds. “For this reason, we believe baby-retailing is best defensive category in the retail sector”.
"Over the last twelve months, Baby Bunting’s competitors have been decimated in the market, leaving it to be the dominant player in the market. Baby Bunting has 50 stores, compared to its nearest competitor who has only 3 stores.
"At present, Baby Bunting is only doing 6% EBITDA margins and we believe margins can get to over 10% in the near-term. We believe the business can grow at over 30% EPS p.a and that the current share price of $2.20 can grow to $3.20 in the next twelve months. We see Baby Bunting becoming the Bunnings of the baby retailing sector."
Costa Group Holdings (ASX: CGC): 30% possible over 18 months
Jun Bei Liu, Tribeca Inestments Partners
"Costa Group is a fresh food company operating in a structurally growing category. The super foods category (strawberries, raspberries, blueberries, avocados, citrus etc)."
"Since listing three years ago, the company has been growing at 26% compounding per annum and we forecast that to grow between 10-15% over the next 5 years on conservative estimates."
"The demand has been underpinned by the consumer shift to having a healthy lifestyle as well as the demand coming from Asian consumers for high quality, fresh produce."
“What’s really special about Costa, aside from being the pure play in the super foods’ category, is the strong management team with their disciplined approach when it comes to investments. They have consistently delivered over 20% ROIC on a three-year basis”.
"The stock at the current price is offering you a great buying opportunity. We believe the company will deliver you a 30% return over the next 12-18 months."
Cisco Systems (NASDAQ: CSCO): Multiple ways to win
Graham Hay, Antipodes Partners
“In many ways, in market cap terms, Cisco Systems is a shadow of its former glory, but as a business, we believe it’s as strong as ever and is facing some very interesting growth trajectories under a new management team.”
Cisco has multiple ways of winning through…
- Competitive dynamics: incumbency and scale open doors to new opportunities
- Product cycle: multiple product cycles; switching, wireless, security and applications
- New management: Similar to what Microsoft did, unbundling their technology stack to meet customer requirements, a web-scale opportunity.
- Regulatory: cybersecurity is a key addressable market
- Macro/style: affordable quality
Trades at 14 times PE vs 20+ times for comparable companies. It has a rising dividend yielding at 3.1% and a free cash flow yield of >8%.
Reliance Worldwide (ASX: RWC): Well positioned and a big market opportunity
David Moberley, Paradice Investment Management
"Reliance is a global plumbing supplies business. It has built an incredibly strong brand in the market for quality."
"Its flagship product, the SharkBite fittings, have been growing at about double-digit growth rates for over 10 years. Despite that, this market still remains heavily underpenetrated at less than 10% share."
“We think it’s a great business, with a strong market position and has a long-run way of growth. We like the management team, the incentives are well-aligned, it’s got a great balance sheet, generates lots of cash, and the current sell-off has created an opportunity to buy into the business at a great valuation.”
Full video available here
(First presentation starts at 17 minutes)
The information contained in this presentation is general in nature and should not be relied upon. Before making any investment or financial planning decisions, you should consult a licensed professional who can advise you whether the decision is appropriate for you. Contributors may have commercial or financial interests in the companies mentioned.
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