MS Global Franchise Fund's 1st-Quarter Portfolio

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The Morgan Stanley Global Franchise Fund has released its first-quarter portfolio for 2020. Changes include new buys of Procter & Gamble Co. (NYSE:PG) and LVMH Moet Hennessy Louis Vuitton SE (XPAR:MC), a sale of the existing Church & Dwight Co. Inc. (NYSE:CHD) holding and additions to the Philip Morris International Inc. (NYSE:PM) and Abbott Laboratories (NYSE:ABT) positions.

The team follows a distinct and disciplined investment process based on bottom-up stock selection, with sector, industry and stock weightings driven by the team’s assessment of each stock’s quality and valuation characteristics. The team monitors signs of franchise abuse, including failing to reinvest capital in high ROIC businesses, preventing compounding by retaining excessive cash and earnings per share targets having precedence over ROIC, which rewards short-sighted behavior.

Portfolio overview

The portfolio contains 31 stocks, with two new holdings. It is valued at $2 billion and has seen a 13% turnover rate.

Top holdings of the company include Microsoft Corp. (NASDAQ:MSFT) (9.49%), Philip Morris International (8.56%), Reckitt Benckiser Group PLC (LSE:RB) (8.29%), Visa Inc. (NYSE:V) (5.39%) and SAP SE (XTER:SAP) (5.14%).

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By weight, the top three sectors represented are consumer defensive (35.36%), technology (21.74%) and health care (21.34%).

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Procter & Gamble

The portfolio saw the addition of Procter & Gamble for the first time since the third quarter of 2015. The team purchased 464,571 shares for an average price of $120.29. Overall, the purchase had an impact of 2.55% on the equity portfolio.

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Since its founding in 1837, Procter & Gamble has become one of the world’s largest consumer products manufacturers, generating nearly $70 billion in annual sales. It operates with a lineup of leading brands, including 21 that generate more than $1 billion in annual global sales such as Tide laundry detergent, Charmin toilet paper, Pantene shampo, and Pampers diapers. P&G sold its last remaining food brand, Pringles, to Kellogg (K) in 2012. Sales outside its home turf represent around 55% of the company’s consolidated total, with around one-third coming from emerging markets.

On June 30, Procter & Gamble was trading at $118.99 per share with a market cap of $295.12 billion. According to the Peter Lynch chart, the stock was extremely overvalued at the end of 2019.

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GuruFocus gives the company a financial strength rating of 6 out of 10, profitability rating of 7 out of 10 and a valuation rank of 1 out of 10. The company boasts an operating margin of 21.77% that places it above 94.09% of the industry alongside a high net margin percentage. The company’s Altman Z-Score places it safe from bankruptcy and the return on invested capital outweighs the weighted average cost of capital.

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LVMH

The team also made a new purchase of 139,688 shares of LVMH for an average price of 386.11 euros ($433.54) per share. This was the first time since the second quarter of 2012 that the fund has owned the stock and the purchase had an impact of 1.05%.

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LVMH is a global producer and distributor of luxury goods. It operates six segments: fashion and leather goods, its largest and oldest; watches and jewellery; wines and spirits; perfumes and cosmetics; selective retailing (including Sephora and airport duty-free retailer DFS); and other (including publishing). Higher-profile brands include Louis Vuitton, Bulgari, Fendi, Givenchy, Tag Heuer, Hennessy, Moet & Chandon, Glenmorangie, Sephora and Benefit. LVMH operates more than 4,500 stores around the globe and is headquartered in Paris.

June 30 saw LVMH trading at 389.50 euros with a market cap of 196.15 billion euros ($220.26 billion). The Peter Lynch chart shows that the stock has been trading above its intrinsic value for the last several years and is overvalued.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 1 out of 10. The company has seen a recent increase in levels of debt, leading to a cash-to-debt ratio of 0.25 that is lower than 63.64% of the industry. The Altman Z-Score of 2.96 still places it in the safe zone from bankruptcy.

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Church & Dwight

The fund sold out of its holding by liquidating its 343,038 shares for an average price of $71.08. The sale represented a -1.16% impact on the portfolio and GuruFocus estimates the holding had a total estimated gain of 15.83%.

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Church & Dwight is the leading producer of baking soda in the world. Around a dozen of its products are sold under the Arm & Hammer brand umbrella, such as baking soda, toothpaste, cat litter and carpet cleaner. Its mix also includes Xtra, Trojan, OxiClean, First Response, Nair, L’il Critters/Vitafusion and Orajel. Nearly three years ago, the company announced the addition of Water Pik, which manufactures oral water flossers and replacement showerheads, to its mix. Church & Dwight derives about 85% of its sales from its home turf.

On June 30, shares were trading at $76.54 with a market cap of $18.86 billion. The Peter Lynch chart suggests the stock was overvalued at the end of 2019.

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GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rank of 9 out of 10 and a valuation rank of 1 out of 10. The company shows a severe warning of assets growing faster than revenue. Cash flows did show improvement in 2019 and debt levels have decreased in the last few years.

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Philip Morris International

The fund added to its long-term holding of Philip Morris International with the purchase of 398,564 shares for an average price of $82.53. The addition had an impact on the equity portfolio of 1.45%.

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Philip Morris International is a leading tobacco company engaged in the manufacture and sale of cigarettes and other nicotine-containing products in markets outside the United States. Through multidisciplinary capabilities in product development, state-of-the-art facilities and scientific substantiation, the company aims to ensure that its smoke-free products meet adult consumer preferences and rigorous regulatory requirements. Management’s vision is that these products ultimately replace cigarettes.

On June 30, the stock was trading at $70.24 per share with a market cap of $109.31 billion. According to the Peter Lynch chart, the stock was trading close to its intrinsic value at the end of 2019 and was fairly valued.

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GuruFocus gives the company a financial strength rating of 4 out of 10, a profitability rank of 8 out of 10 and a valuation rank of 6 out of 10. High levels of debt throughout history have led to the cash-to-debt ratio of 0.13, placing it lower than 77.78% of the industry. The company does show high-ranking operating and net margin percentages.

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Abbott Laboratories

The team’s last largest addition to the portfolio was the purchase of 250,894 shares of Abbott Laboratories for an average price of $83.67. The addition had an overall impact of 0.99% on the equity portfolio and the total estimated gain is 30.10%.

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Abbott manufactures and markets medical devices, adult and pediatric nutritional products, diagnostic equipment and testing kits and branded generic drugs. Products include pacemakers, implantable cardioverter defibrillators, neuromodulation devices, coronary stents, catheters, infant formula, nutritional liquids for adults and immunoassays and point-of-care diagnostic equipment. Abbott derives approximately 60% of sales outside the United States.

June 30 saw the company trading at $89.74 with a market cap of $158.13 billion. The stock was overvalued at the end of 2019 according to the Peter Lynch chart.

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GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 2 out of 10. While the company’s operating margin percentage has declined, it still ranks higher than 76.62% of the industry alongside a net margin percentage that outranks 75.65% of competitors. Despite the low cash-to-debt ratio, the company maintains an Altman Z-Score of 3.93, well into the safe zone.

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Disclaimer: Author owns no stocks mentioned.

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This article first appeared on GuruFocus.