Research Trip – US 2015

Joel Connell
Senior Global Equities Analyst
March 2015
Joel Connell
Senior Global Equities Analyst


Research Coverage

Primary: Healthcare and Consumer Staples 
Secondary: Financials

Research Trip – US 2015

March 2015

Joel Connell, Global Equities Analyst at Bell Asset Management, travelled to the US for 3 weeks over February and March, attending conferences and visiting a range of companies in Miami, New York, San Francisco, Minneapolis and Boston.


What was the purpose of the trip?

The purpose of the trip was to meet with the management teams of a range of companies which we are currently invested in, and also to build my knowledge on a number of new potential investment ideas. My meetings were predominately focused on Consumer related companies, but I also met with companies across other sectors including Healthcare and IT.


What stood out most about the companies you visited?

I would regard the overall tone of the management teams that I met with as being ‘cautiously optimistic’. There is certainly some concern around near term currency headwinds and the negative impact from slowing emerging market growth, but generally speaking the improved economic conditions in the US are translating into improving business confidence and growing profits across US corporates.

During my discussions with other analysts and investors, one thing that struck me was the complacency regarding valuations across equity markets. Whilst almost everyone I spoke with acknowledged that earnings multiples felt stretched, the general consensus was that equity markets would continue to move higher. Our investment team doesn’t necessarily disagree with this but we have also been working hard to ensure our portfolio is well positioned to continue to outperform even if we have an unexpected market pullback.


How is this sector / region performing at present? 

The US equity market has performed strongly in recent years in both absolute and relative terms, with the S&P 500 Index up 63% over 3 years to the end of February (+125% in AUD terms). However, in the past 12 months other key global markets such as Japan and Europe have been playing catch up and have outperformed on a relative basis in recent months.


What can local investors learn from this market?

The US is home to many of the best quality companies in the world. By investing in the US and many other global markets, Australian investors can gain much greater exposure to high quality growth and defensive stock in sectors including IT, Healthcare, Consumer Staples and Consumer Discretionary. The Australian market often lacks depth in these sectors given its high concentration towards Financials and Materials.


Do you have any holdings in this sector / region?

Yes, we have a diversified global portfolio with holdings across North America, Europe and a small exposure to Asia. Our portfolio has been overweight US equities for the past couple of years, with overweight exposure to sectors including Consumer Discretionary, Consumer Staples, Healthcare and IT. On this trip I met with a number of our existing holdings, including Church and Dwight, Starbucks, International Flavours and Fragrances, MasterCard and Varian Medical.


Are you considering changing your allocations to this sector / region?

I would not expect any drastic changes to our geographic or sector allocations. We continue to maintain a balanced global portfolio designed to outperform in up and down markets.


What is driving the growth in this sector / region?

Based on my discussions with management there appears to be some early signs that lower oil prices are starting to have a positive impact on US consumer spending.

M&A activity should remain strong given the strength of corporate balance sheets and ongoing low interest rates. Effective capital deployment and management discipline is very important considering the increasing valuations of many acquisition targets.

Among the food and beverage related companies, a much greater focus is being placed on health and wellness. The Millennial generation is driving a surge in demand for more natural and organic food alternatives.


What are the risks to this sector / region?

The currency headwinds for US based multi-national companies is a key concern given the strength of the US dollar over the past 12 months. In addition, the slowing economic growth in many countries outside of the US, especially emerging markets, is proving a headwind for many globally exposed companies.

Wage pressures may also intensify as the US unemployment rate falls (down from 9.9% in 2009 to 5.7% currently), potentially putting pressure on corporate margins. A number of US companies, including WalMart, Target, Costco and Starbucks have recently been raising wages for their lowest paid workers to levels well above the $7.25 federal minimum.

An added risk for equities comes from high valuations across most sectors. As an example, the forward P/E multiple of the MSCI World Consumer Staples Index is now close to 20x versus 15x at the end of 2012 and as low as 12x during the GFC. The valuation expansion has occurred despite some sub-segments of the Consumer Staples sector such as carbonated beverages, tobacco and packaged foods, arguably facing more structural challenges than ever before.

Many of the companies I met with, especially in the Consumer Staples sector, have been focusing on cost restructuring or productivity initiatives (i.e. zero-based budgeting) to help offset some of these headwinds to top line growth.


What implications do these findings have for your portfolios?

While my trip to the US has uncovered a number of new potential investment ideas which our team will work on in the coming months, we do not expect to make any material changes to our portfolio. We will continue to invest in highly profitable companies with strong franchises, high quality management teams and solid financials, while remaining diligent about the price we are willing to pay for these stocks.


Most interesting or unusual custom you came across?

Having travelled to the US a number of times I didn’t face too many unusual customs but I did find the weather very interesting to say the least. It was 23°C below zero on the day I flew into Minneapolis, and both New York and Boston were also in the midst of extremely cold wintery conditions. Prior to my arrival in Boston, the city had suffered its highest monthly snowfall on record. Fair to say that I made a contribution to the US economy through my purchases of extra winter clothing.


Next planned trip?

I haven’t yet planned my next trip but some of my colleagues are due to visit the US and Europe over the next couple of months.

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Research Trip – US 2015

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