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By sector, here are the 30 members of Standard & Poor's Global Picks 2005 portfolio -- the collective "best ideas" of S&P's equity research staff worldwide (see BW Online, 1/6/05, "A Wide World of Stock Picks") -- and a brief investment rationale from S&P for each:
Burberry: We believe Burberry will capture a larger proportion of its brand value via the integration of distribution in Japan, Spain, and the U.S., where most of the retailer's revenues are generated through license and wholesale income. Further development of its accessories business should add more balance to its product mix and create opportunities for margin expansion.
Esprit Holdings: Esprit has consistently delivered. Its net profit has a compounded annual growth rate of 52% over the past three years as a result of what we view as its effective merchandising strategy and strong brand equity. Although we think growth will moderate somewhat, net profit should still rise by more than 20% a year over the next two years, driven by increased market penetration of its wholesale business and improving retail margins.
Harrah's Entertainment (HET
): S&P expects this diversified gaming company to acquire Caesars Entertainment by mid-2005, which should provide both revenue-enhancement and cost-reduction opportunities. We expect that the transaction will boost Harrah's presence in a number of markets, including Las Vegas and Atlantic City. Looking ahead, S&P expects Harrah's to benefit from efforts to encourage customer loyalty, and we expect it to have opportunities to use the Caesars brand with additional gaming facilities. Trading at a discount to peers, we believe the stock is underpriced.
Mediaset: With an audience share of 45% in prime time spread over its three channels, Mediaset's Italian broadcasting business enjoys a dominant position in its primary market. This, combined with its majority stake in leading channel Telecinco in Spain, should allow it to effectively fight off the threat of fragmentation and thus continue, in our view, to enjoy advertising growth ahead of the market's expectations.
): Our recommendation is based on what we see as Chattem's leading market position in niche personal-care categories and attractive valuation. Successful operations in niche categories such as over-the-counter health-care products, dietary supplements, and skin-care products, affords Chattem the highest operating margin in our personal care universe at over 25%. We think the stock is underpriced relative to forward p-e, p-e to growth rate, and discounted free-cash flow.
Danone: Among the larger European food companies, Danone is the fastest growing in our coverage universe. We're forecasting sales growth from existing operations of 6.5% in 2005 gradually slowing down to 5.4% by 2008, vs. Danone's target range of 5% to 7%. We're also expecting operating margin gains to average 33 basis points over the forecast period, which should drive an 8% compound annual growth rate in earnings per share.
China Oilfield Services: Despite expected upcoming corrections in crude prices, we believe that China Oilfield Services will continue to deliver strong earnings into 2005, profiting from China's oil demand, which is forecasted to break 6 million barrels per day. Anticipated pressure from Beijing to quench this thirst with domestic exploration and production, coupled with the company's increasing utilization rates and recent rig and vessel investments, leaves it well-positioned for continued earnings growth, in our view.
Devon Energy (DVN
): On an earnings and cash flow basis, we believe Devon is among the most attractively valued stocks in our universe of exploration and production companies. We like its emphasis on North American production and natural gas reserves, and think it will continue to control cash-operating costs more successfully than peers due to savings resulting from its merger with Ocean Energy. We see substantial excess cash generated from operations as well as divestiture proceeds being used to accelerate balance sheet improvements and to repurchase common stock.
): We think Total's premium to its peers is justified based on its higher return on investment and above-average production growth at a relatively low cost.Financials
CapitaMall Trust: CapitaMall Trust is a real estate investment trust that owns what we view as well-located retail malls in Singapore that are enjoying strong rental trends due to the limited supply of retail space and improving consumer spending on the island. In our opinion, the trust offers a relatively attractive dividend yield, which we expect to be improved further by the trust's asset-enhancement initiatives as well as by potential yield-accretive acquisitions.
): We believe Citigroup's geographic and product diversity, focus on expense management, improved credit quality, profitable capital allocation, and strong global brand will result in above peer-average double-digit earnings growth in 2005 and beyond. Trading at a forward p-e that's materially discounted to the historic average of both Citi and its large-cap bank peers, we think the shares are undervalued.
Goldman Sachs (GS
): We think Goldman has a solid competitive advantage, due to the global footprint of its investment-banking franchise, the consistency of its sales and trading revenues, and the growth of its asset-management business. We expect strong growth in its financial-advisory, equity-underwriting, and merchant-banking businesses to more than offset a decline we see in the fixed-income division in fiscal 2005. Recently priced well below its historical multiple, we view the valuation as attractive.
Keppel Land: Keppel Land is leveraged into the still-robust Chinese residential market and the Singapore property sector, which is showing a broad recovery. We believe this gives Keppel more play in launching its local residential projects and offloading low-yielding assets.
Royal Bank of Scotland: Royal Bank of Scotland's unusual business model, in our view, allows it to keep front-line brands that retain and attract more customers, while achieving cost efficiencies with centralized processing. After the successful integration of NatWest and a string of other acquisitions, we think the group now has scope for organic growth. Royal Bank of Scotland has been successful in growing a relationship-driven wholesale business. We see the consumer and credit-card business as poised for extension in both the U.S. and Europe, without taking on much subprime credit risk. Meanwhile, we believe the underlying impact of new accounting standards will be limited.
Novozymes: It has demonstrated stable high growth and improving margins, and is a market leader in enzymes. Novozymes is now looking to break into other areas such as contract manufacturing of pharmaceuticals proteins and biopolymers, and we expect 2005 to offer a lot of news on these development projects as they progress through the pipeline. With expected support from a share-buyback program, we expect strong margin improvement to help lift the share price, despite our view of premium valuations.
Roche: With financial income issues seen on the road to resolution, the sale of the vitamins business complete, the divestment of its over-the-counter products, and greater overall transparency viewed in its strategic direction and financial reporting, we believe Roche has established itself as a key player in the European pharmaceutical sector. We think the strength of its integrated strategy (combining its niche market high-value drugs with its strength in diagnostics) in a rapidly evolving health-care market is a key competitive advantage. We expect Roche to register one of the highest earnings growth rates in its sector, with a five-year compounded annual growth rate in EPS projected at over 14% (compared to the peer group average of 9%).
): We believe Sanofi should deliver double-digit earnings growth from 2004 to 2008. As earnings clarity improves over the next six months, in our view, and the Plavix patent issues are likely resolved, we believe the discount to peer multiples will fade.
): We see significant new growth opportunities for this managed-care concern, formed through the December, 2004, merger of Anthem and Wellpoint Health Networks. In our view, WellPoint has the ability to generate membership growth above its peer group in 2005, aided by its Blue Cross/Blue Shield licenses and extensive product offerings. We look for EPS to grow in excess of 15% a year for the next three to five years, and we believe the stock is attractively priced relative to its HMO peers on a price-to-earnings and forward PEG basis.Industrials Cathay Pacific Airways: Revenue growth is strong, and forward bookings appear very encouraging to us, as Cathay expands its global network. In addition, we think its recently acquired 10% stake in Air China could provide opportunities for Cathay to gain more access into mainland China's aviation market.
Cosco Pacific: Cosco Pacific is transforming itself into a container-port investor through acquisitions in China and overseas. We believe this has enhanced its longer-term earnings growth profile. While valuations appear rich, we don't view them as unreasonable given the prospects of earnings enhancement through potential acquisitions and positive news flows from a buoyant shipping market.
): This global industrial conglomerate should benefit from accelerating growth in the nonresidential construction market, ongoing new product introductions, strong demand for security, and margin expansion. The stock is priced below the historical average and peer group p-e multiples, and we also find it undervalued based on our discounted cash-flow analysis.
Securitas: Securitas is the world's leading security-services provider. We believe it will benefit from the current pick-up in demand for security services driven by improving economic conditions worldwide. In particular, we expect Securitas to gain market share with its U.S. operations, as it completes the integration of its acquisitions there.
): Canon should continue to leverage its high market share of digital still cameras (DSC). Since Canon produces key parts such as lenses and imaging-processing chips, we believe the operating margins from DSC should remain intact, shrugging off any price pressure. Also, product differentiation -- such as portable printers for DCS -- is working in its favor in terms of earnings.
): We believe this leading supplier of PCs has an opportunity to gain incremental market share in 2005 following IBM's (IBM
) planned sale of its PC unit to Lenovo Group (LNVGY
). We think Dell will also take share from Hewlett-Packard (HPQ
) in servers as HP continues to struggle with its strategic roadmap and execution in the enterprise unit. We think Dell's ability to gain share could yield strong earnings growth, which could spur stock price appreciation.
): We believe ValueClick will benefit from increasing spending on Internet advertising in the U.S. and around the world. ValueClick enables marketers to advertise and sell their offerings through a variety of online channels including display advertising, keyword search, and e-mail, and we believe this diversification offers unique and notable appeal. We see the stock as compellingly valued based on comparative and intrinsic valuation analyses. ValueClick also has what we consider to be a very healthy balance sheet.
Yanzhou Coal (YZC
): We think Yanzhou Coal is a good proxy for China's energy thirst, with a domestic coal supply deficit that's expected to widen to an estimated 80 million tons in 2005. While price gains could continue to propel decent earnings growth in 2005, valuation is relatively attractive vs. its international peers, in our view, trading at 9.2 times the estimated 2005 EPS.
): We believe this rural carrier's prospects are more favorable than those of the Baby Bells, based on our view of limited competitive pressures from wireless and cable carriers and what we see as higher earnings quality, based on our projection of S&P Core EPS. We note that CenturyTel maintains an S&P Earnings and Dividend Rank of A, which indicates stability in growth of earnings and dividends over the past 10 years.
China Mobile (CHL
): This leading telecom play is dominant in the cellular sector. It has what we view as attractive valuations that are underpinned by growth of disposable income in China's middle class.
DiGi.Com: Robust rates of subscriber growth should continue into 2005. In our view, its valuations are attractive and stand at a discount to domestic peers. We believe the market has yet to properly value the stock for more than holding its own against its larger competitors.
): Endesa's investment case rests on our view of sound growth from its core domestic (Spanish) business, overdiscounted concerns, growth from Latin America, and attractive valuations.