By Mark Nelson, Senior Equity Analyst, Killik & Co
As we approach winter the investment climate continues to change with inflation steadying and the central bank finally hitting a pause on rate rises. With opinions on the future of the market very much split, Mark Nelson, Senior Equity Analyst at Killik & Co has picked out five stocks expected to weather the uncertainty and generate strong returns going forward.
Mark’s top five picks:
- Walt Disney
- Ecolab
- LVMH
- Schneider Electric
- Intuit
1. Walt Disney – Park and cruise investments set to reap rewards
In September, Disney hosted an Investor Summit where it announced plans to invest $60bn in capital expenditures in expanding and enhancing domestic and international parks and cruise line capacity.
Disney’s domestic theme parks have exhibited strong historical results and are a crucial profit driver for the company, with previous investments resulting in meaningful increases in park attendance and higher profits. As such, we believe that investing in expanding and enhancing theme parks related to some of its most valuable IP – including Frozen, Black Panther, and Coco – has the potential to drive significant returns over the long-term.
Cruise lines have also been an underappreciated bright spot for the company, with management confident on the growth trajectory for the business and three new ships launching in the next few years. Disney’s cruise lines boast 2x the yield of the industry, partly due to it having more family staterooms which means it can host more passengers per cabin than any other cruise line. This has led to double-digit returns on its previous cruise investments.
Shares in Disney have been under pressure recently, currently trading c.25% below their 52-week high. We think this underperformance, largely due to concerns over the company’s legacy TV business, is unwarranted, and the market is overlooking the growth potential of Disney’s parks and resorts, as well as an upcoming inflection to profitability in the company’s streaming business.
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2. Ecolab – Pandemic bounce back
Ecolab is a global leader in providing clean water and safe workspaces across a plethora of industries, with the goal of improving the environment by helping its customers reduce energy, labour, and water usage. Regularly named one of the most ethical and sustainable companies in the world, in 2017 it came in second in Newsweek’s Green Rankings.
The customer is at the heart of everything the company does, with ongoing product innovation driving market share gains and ultimately, revenue growth. Despite being over four times larger than its nearest competitor, Ecolab has only a 10% share of the $152bn total addressable market globally, suggesting a long runway to increase penetration at the expense of smaller, less able competitors.
Whilst the pandemic initially had a positive effect on demand for hygiene and sanitation across workplaces, it quickly became apparent that many of its leisure and tourism customers (i.e. restaurants and hotels) would suffer from lockdowns and forced closures. Whilst the world is largely back to normal today, the significant inflationary pressure of the last 18 months presented another challenge to the company, as it struggled to pass on input cost inflation to its customers. Thankfully, as highlighted at its Investor Day recently, the company has been able to raise prices to more than compensate for these higher costs, providing a boost to profitability.
It appears the company is back to its winning ways from before the pandemic, with earnings per share expected to compound at a low-to-mid teens rate over the coming years. Against this backdrop, we find shares attractively valued in below medium-term averages, despite the improving operational performance.
3. LVMH – Defensive exposure to the luxury sector
LVMH shares have pulled back over the last four months, starting following second quarter earnings in July and then accelerating earlier this month as third quarter results fell short of expectations. The turbo-charged growth of the luxury sector has begun to slow, as Chinese demand, particularly abroad, has not rebounded as strongly as some might have hoped.
While the LVMH management team themselves admit to not being able to predict short-term trends for the industry, they have been excellent long-term stewards of the business, focusing on enhancing the desirability of their portfolio of brands and in turn the business’ competitive position over the last three decades.
We believe that the luxury sector remains an attractive area of investment. Long-term demand is expected to be supported by growing wealth in emerging economies, while the industry’s premier players enjoy meaningful competitive advantages in our opinion, including through the strength and heritage of their brands, the bargaining power they have with owners of prime real estate, and the barriers to entry provided by the relatively high fixed costs.
LVMH shares trade on a price-to-December 2024 earnings ratio of 19.4x, below the average of the last five and ten years. We believe this represents an attractive entry point into a very high-quality business that provides relatively defensive exposure to the luxury sector.
4. Schneider Electric – Long term positioning
Schneider Electric is a global provider of energy and automation products, systems, software, and services. The group operates in two segments: Energy Management, 77% of group sales in 2022, and Industrial Automation, 23% of group sales.
Shares in Schneider Electric represent a play on two long-term structural growth opportunities: decarbonisation and digitalisation.
According to the International Energy Agency, in order to decarbonise the global economy and achieve net zero, electricity needs to increase its share of the overall energy mix from around 20% currently to 50% by 2050. At the same time, total energy consumption must decline by 15% from 2020 levels over the next thirty years, despite expected population growth of around 1.5 billion.
Schneider’s Energy Management business is the leading electrical franchise globally, helping customers to make the most of their energy and to accelerate their journeys to net-zero carbon emissions. The Energy Management business is also a play on the digitalisation of the global economy through the products and services that it provides to data centres. Additionally, we expect the Industrial Automation business to see growth as industry invests in automation to improve operating efficiencies, safety, and sustainability. This growth will be supported by Schneider’s high-quality software businesses Aveva and OSIsoft.
We also view Schneider Electric’s shares as being relatively defensive, with high levels of cash generation supporting a healthy dividend which is supplemented by share buybacks. The shares trade on a price to December 2024 earnings ratio of 17.9x, an attractive valuation for a business that we believe can grow its earnings at a low double-digit growth rate over the medium term.
5. Intuit – One-stop shop for financial organisation
Intuit is a US-based financial software business, best known for its QuickBooks accounting software and TurboTax DIY tax preparation software. It has long benefitted from strong competitive positions and defensive revenue streams in these core businesses, but they now represent merely the base from which Intuit is building a much more ambitious business.
For its small business and self-employed customers, Intuit is increasingly offering not just accounting software, but a complete end-to-end technology platform, encompassing the entire small business owner’s journey from customer acquisition, to payments, capital provision, payroll, live expert advice and compliance. Furthermore, through its new accounting software for mid-market businesses, Intuit aims to retain customers as their businesses grow from small to medium-sized, and their needs become more complex.
Meanwhile, with the 2020 acquisition of the consumer finance technology platform Credit Karma, Intuit is building a ‘one-stop shop’ for consumers to organise their finances, extending what was a once-a-year tax filing interaction, to a year-round relationship that incorporates current and savings accounts, as well as recommendations and advice on financial products.
Intuit is also a key beneficiary of generative AI, in our view. It has a massive quantity of data, 500,000 customer and financial attributes per small business, 60,000 tax and financial attributes per consumer, and nearly 20 billion transactions imported from financial institutions annually. Importantly, this is data that only Intuit has. The recently unveiled Intuit Assist generative AI platform, now integrated across its various offerings, can harness this data, driving more frequent and meaningful customer engagements, and reducing churn while also providing another lever for ARPC growth.
Intuit shares have had a strong run recently: they are up c.40% year to date and trade on c.33x July 2024 earnings. However, we believe that if the company can execute on its exciting initiatives in generative AI, service-based offerings and the business mid-market – and there is some normalisation in the macro-environment – then there is potential for top-line growth to accelerate from low-teens currently, beyond the mid-teens growth implied by long-term guidance, to a high-teens growth rate, exceeding current market forecasts.
