Sanlam Private Wealth stock picks for 2016 – Part 2

By Janice Roberts

sanlam uk

Every December, Sanlam Private Wealth’s analysts choose the stocks they expect to offer the most value to investors in the coming year.  William Ball, Senior Equity Analyst, Sanlam Private Wealth UK, looks at global stocks.


We believe Medtronic is competitively well placed. It holds the number one position in almost every product category it’s in, has a leading distribution footprint, deep clinical expertise and a strong pipeline programme. We are attracted to the company’s emphasis on gross margin stability, operational leverage and its long-term financial goals. Management has a disciplined approach to allocating capital, with a focus on creating shareholder value and delivering long-term dividend growth. The company has a solid track record of allocating capital. Once the recent Covidien transaction has been fully integrated into the business, we expect returns on capital over the cost of capital will be at least 3.5 times.

The company has a prolific track record of generating free cash flow, having achieved an impressive conversion rate averaging more than 110% over the past 10 years, excluding the Covidien acquisition. We see this trend continuing, with Medtronic aiming to generate ~$40 billion in free cash flow over the next five years. This is from a starting market capitalisation of $100 billion – equivalent to an 8% free cash flow yield.


Our investment case is based on the premise that Roche is a scientific leader, enabling it to develop and spearhead many new and exciting therapies. This is a business that has a wide economic moat, driven by its impressive portfolio of biologics and leading position in diagnostics. Its hugely successful and clinically effective oncology drugs continue to grow and gain further approvals in emerging markets, providing relatively inelastic demand. Unlike the traditional small molecule drugs, which are subject to generic competition, biologics are made using specialist materials, have far more complex structures and require specialist manufacturing.

Roche has been developing a large number of biologics through phase III trials during the past few years in fields such as oncology, immunology, haematology and cancer immunotherapy. The immunotherapy pipeline looks exciting to us, with impressive data at the American Society of Clinical Oncology 2015.

American Express (Amex)

American Express operates a powerful closed-loop network that enables it to generate excess economic profit backed by valuable intangible assets in the form of its brands. The secular opportunity for Amex and the other two networks (MasterCard and Visa) is significant, with high global cash penetration rates and personal consumer spending growth expected to be at least in the low single digits for the foreseeable future. While the overall market is set to become more competitive, we find the company’s differentiated and balanced business segment economics an advantage that should provide growth opportunities and protect against competitive threats.

Since the financial crisis, Amex has significantly reduced its dependency on securitisation and unsecured term debt, providing greater assurance that the funding mix is less aggressive. We currently do not have any concerns about its liquidity profile.

This is a business that has produced an impressive $40 billion in free cash flow since 2010, providing management with the opportunity to invest in growth opportunities and return cash flow to shareholders. This name has appealing long-term targets to grow revenue by at least 8%, achieve EPS growth of 12-15% and maintain a minimum return on equity of 25%.

Yum! Brands

Having enjoyed a stellar stock price performance in the first half of 2015, Yum! Brands significantly rerated to the downside after a poor set of Q3 results. This prompted a managerial rethink, followed by an announcement that the company would spin off the China business into a separate entity.

We feel this sets up Yum nicely for a structure that will let the business focus more on long-term value creation. There has been a sense for quite some time that a specialist management team is needed in China in order to refocus on sales growth, and rid the brand of a poor image acquired on the back of various ‘health scare’ scandals.

With a 2016 normalised return on equity estimate of 140%, and a blended forward price to earnings ratio of 21 times, we see attractive returns for the long-term investor.


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