If you weren’t invested in the Magnificent Seven tech stocks, investing in equities in 2023 was a bit like treading water in treacle. Heavy going.
The Magnificent Seven is up on average over 100 per cent in the last year and in contrast, most other markets have only experienced very modest, if any, returns. Everyone expected more of a bounce back last year after the annus horribilis that was 2022.
So what about the future? Should investors jump on the tech bandwagon? Not necessarily. In November we had a glimpse of what the future might hold, when central banks cut rates.
Richard Champion (left), co-chief investment officer, and Simon McGarry (right), head of equity fund research, Canaccord Genuity Wealth Management
Equities rose alongside bonds and those that were hit hardest by rate cuts (infrastructure, healthcare and small UK companies) rose most. So for investors, they might want to bear in mind the words of the great Wayne Gretsky, ‘play where the puck is going, not where it’s been’.
Every investor has unique financial circumstances and different levels of risk tolerance, so the ideas on our radar won’t be for everybody. You should speak to a finance professional if you’re unsure.
CRH
CRH is a leading diversified manufacturer and distributor of building materials and products. Its wide range includes cement, aggregates, asphalt, ready-mixed concrete, as well as other building-related products.
CRH is well positioned in the US market, where it is:
- The leader in aggregates, with more stone in the ground (over 90 years’ supply) than anyone else
- Five times bigger than the number-two player in road construction
It is also the most exposed of its European peers to US infrastructure (c.30 per cent of group sales) where the mid-term growth outlook is strong, given Biden’s 2021 infrastructure bill aiming to fix 20,000 miles of road and 10,000 bridges over five years through a $110billion investment.
Acquisitions have been a key part of growth over the last few years, with assets acquired from LaFarge-Holcim for €6.5billion in 2015.
Since 2008, capital discipline has been at the forefront of decision-making, with CRH disposing of assets that don’t provide acceptable long-term growth and margins. These include its European distribution business (2019, €1.6billion), Oldcastle (2022, US$3.8billion) and its European lime business (2023, US$1.1billion).
In contrast to several of its peers, who have experienced post-merger margin pressure, CRH has delivered ten consecutive years of margin improvements.
With the company trading at a large discount to US peers, such as Martin Marietta Materials and Vulcan Materials Company, CRH moved to a US primary listing last September. Although this discount has since partially narrowed, there is lots to go for, with CRH trading on 2024 EV/EBITDA* of 7.6x, vs. Martin Marietta (14.1x) and Vulcan (14.4x).
While we don’t know when, or even if, CRH will trade at a premium to its US peers, we see scope for the valuation discount to narrow materially in 2024.
IG Design Group
IG Design creates, manufactures, and sources a wide range of celebration-related goods, and sells internationally to major retailers. It is the world’s third-largest producer of greetings products (behind Hallmark and American Greetings): a highly fragmented market worth c.£15billion at retail.
Major products include gift wrap (for which IG design is number one globally), cards, crackers, ribbons, stationery, boxes, and bags. It sells over 600 million units per annum in 80 countries through over 200,000 retail outlets.
The group manufactures around a third of the products it sells, with the remainder sourced from third parties, predominantly in China.
IG Design has a blue-chip customer base comprising many of the world’s largest retailers, including Walmart Inc., Costco Wholesale Corporation, Amazon.com, Inc., Tesco PLC, ASDA Stores Limited, Carrefour SA, WH Smith PLC, Primark Stores Limited, and TJX Companies, Inc.
In the 2022 financial year, margins and earnings were severely reduced by unprecedented supply chain cost increases. Most of these issues have now eased and the business is experiencing continued profit recovery. In the first half of 2023 (the seasonally stronger half), profit was up 27 per cent to $35million and good growth is expected year-on-year.
The business remains well capitalised. Medium-term capital investment will focus on deployment of technology to support growth.
With challenges being addressed through pricing and a variety of self-help initiatives, continued recovery in profitability is anticipated in FY2024.
According to consensus, the shares currently trade on a Mar-24 price-to-earnings ratio (P/E) of 17.8x, falling to 7.9x in Mar-25, with a further recovery in earnings likely in FY26.
IG Design creates, manufactures, and sources a wide range of celebration-related goods, and sells internationally to major retailers
Pernod Ricard SA
Pernod Ricard is a leading wine and spirits company, with a diverse portfolio of whisky, cognac, brandy, vodka, and gin brands including The Glenlivet, Jameson, Martell, Absolut, and Beefeater.
The company’s growth has been driven by two major changes in consumer drinking habits. Firstly, general preference has shifted from beer to spirits.
Spirits made up 35% of total global alcohol expenditure in 2015, rising to 41 per cent in 2022, while beer consumption concurrently decreased from 40 to 38 per cent. This trend has positively impacted Pernod Ricard’s spirit brands.
Secondly, there has been a preference towards premium spirit brands, which have outpaced the growth of the broader spirit market.
This has materially benefitted Pernod Ricard’s portfolio, with premium spirits contributing to approximately 80 per cent of the company’s sales growth during the 2023 financial year (July 2022 to June 2023).
Pernod Ricard is also benefitting from a strong demographic tailwind. Globally, the number of people of legal drinking age is projected to grow by 1.3 per cent from 2020 to 2025, according to United Nations estimates. This surge is anticipated to bring approximately 100 million more consumers into Pernod Ricard’s target market, which should further support revenue growth.
Pernod Ricard also has an attractive emerging market bias, generating approximately 40 per cent of its revenues from developing markets, with leading positions in India and China.
Pernod Ricard has strengthened its leading position in spirits through complementary acquisitions. Gin brand Malfy, for example, was acquired in 2019 and has since trebled in sales.
Jameson whiskey is among Pernod Ricard’s stable of brands
Walmart
Walmart is one of the world’s largest retailers, operating more than 10,000 stores globally. The business is split into three main segments:
- · Walmart US – the largest retailer in the United States, selling groceries and general merchandise through Walmart stores and Walmart.com
- · Walmart International – operating a variety of stores and e-commerce platforms across 19 countries, including Canada, China, India and Mexico
- · Sam’s Club – a membership-based retailer similar to Costco Wholesale Corporation, known for its bulk-selling.
Despite its dominant retail position, Walmart has several initiatives to improve revenues and operating margins across its US business. A key driver is the strong growth of Walmart.com which, according to estimates, has nearly doubled its market share of e-commerce sales in the US since 2020.
Walmart is also investing in robots and automation across its distribution network, and by 2026 aims to have over 50 per cent of its stores serviced by automated facilities.
Walmart International is strategically positioned in key developing markets such as China, India and Mexico. Its international footprint covers 40 per cent of the global population, which Walmart estimates should contribute to 50 per cent of global growth outside of the US.
Walmart is the largest retailer in the United States, selling groceries and general merchandise through Walmart stores and Walmart.com
Smith & Nephew
Smith & Nephew is a medical equipment company which develops, manufactures, and markets medical devices for use in orthopaedic reconstruction, trauma and clinical therapies, sports medicines and advanced wound management.
Before the COVID-19 outbreak, S&N consistently delivered operating margins of over 20 per cent. The last few years have been less impressive, with margins contracting to 11 per cent in 2020 and only recovering to 16.8 per cent in 2022 – the result of global supply chain challenges and inflation.
Growth also deteriorated, with sales growing at an average annual rate of just 3 per cent from 2019 to 2023 – roughly half the rate between 2012 and 2019.
This deterioration in performance led to the recruitment of a new CEO, Dr Deepak Nath, from Siemens Healthineers AG in April 2022.
After just 18 months in charge, much changed under his leadership, with a medium-term guidance target of c.5 per cent underlying revenue growth, coupled with a recovery in margins to above 20 per cent by 2025. In July 2022, Nath detailed a 12-point plan to achieve these targets.
By Q2 2023, we saw some green shoots of recovery, with orthopaedics growing by 5.8 per cent; notably, the largest and most challenging specialisms, hips and knees, grew by 3.4 per cent and by 7.8 per cent respectively.
With the shares 44 per cent below January 2020 highs, we believe there is significant upside if Nath can achieve his targets, given that S&N trades on just 15x 2024 expected earning vs. Stryker Corporation, a US peer, on 26x.
Richard Champion and Simon McGarry are is co-chief investment officer and head of equity fund research, respectively, at Canaccord Genuity Wealth Management.
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