Global Champions At Bargain Prices

Published in Investing on 31 January 2012

These eight FTSE 100 firms are going cheap.

Take a look at the performance of the FTSE 250 index over the last ten years, and one thing is immediately clear: Britain's mid-caps have soared in price.

And, as I've written before, it's precisely because of this strong performance that I hold a decent chunk of my own portfolio in a low-cost FTSE 250 index tracker from HSBC (LSE: HSBA).

Yet the flipside of that logic isn't always appreciated, says Fidelity's amiable James Griffin, manager of the company's Fidelity MoneyBuilder Growth Fund.

"As the FTSE 100 has under-performed the FTSE 250 for over a decade, many larger companies are now at very appealing valuations," he notes. What's more, he adds, a select few are truly global champions, with strong brands and rock solid balance sheets.

Mighty giants

"In the bull market years a common criticism of large companies was that 'elephants don't gallop'," he says. "A large company supposedly had more limited room for growth compared with more nimble, smaller companies -- and as a result, many of these larger companies have de-rated over the last decade."

Consider, for instance, that the FTSE 100 is virtually where it was in 1998. Or that the share price of GlaxoSmithKline (LSE: GSK) is the same as it was in 1997. Or that the FTSE 100 is trading on a P/E of 10 or so, just a third of its level in early 2000.

As a result, says Mr Griffin, the FTSE 100 is stuffed with bargains -- some of them global champions, with strong global franchises developed over many years.

Financial muscle

"Post-2008, the world has changed," said Mr Griffin, when I caught up with him earlier today. "It's changed in favour of companies with strong balance sheets -- which confers an advantage that bigger companies haven't always been able to exploit in the past."

In the world of M&A, for instance, these days it's the playground bullies with the strong balance sheets that win -- whereas in earlier times, they might have been outbid by niche private equity firms.

FTSE 250 companies, in contrast, lack the brawn and financial muscle of the global giants in the FTSE 100: built for speed, they're easily buffeted by adverse economic headwinds.

Size isn't everything

Even so, bigger isn't automatically better, stresses Mr Griffin. "Not every big company is a buy," he asserts. Despite its strong balance sheet, for instance, AstraZeneca (LSE: AZN) -- where concerns over its pipeline of new drugs are an issue -- is a business that he wouldn't touch.

And nor is bigger automatically cheaper, he adds, pointing to the fact that the valuations of tobacco companies such as British American Tobacco (LSE: BATS) are now at significant premiums to historical levels.

So which global champions does he like?

Perfect picks

Mr Griffin has no hesitation in pointing to eight FTSE 100 stalwarts that he thinks are worth taking a long, hard look at.

I've listed them below, together with their prospective P/Es and yesterday's closing price.

CompanyP/EShare price
Pearson (LSE: PSON)12.51,155p
Rolls-Royce (LSE: RR)11.8733p
Diageo (LSE: DGE)14.31,418p
GlaxoSmithKline (LSE: GSK)10.51,427p
WPP (LSE: WPP)9.8737p
BG Group (LSE: BG)13.21,404p
Johnson Matthey (LSE: JMAT)13.82,021p
Rio Tinto (LSE: RIO)6.73,798p

Two, I hold myself. A couple of others are on the watch list. Yet others -- such as Johnson Matthey and WPP -- I've barely considered. Let us know what you think in the box below.

> Here's your free Essential Investor Kit. Over the next few weeks, you'll get share ideas, a sector report and much, much more. Don't miss out!

 

> Malcolm holds shares in Rolls-Royce, AstraZeneca, and GlaxoSmithKline. He also holds HSBC's FTSE 250 index tracker. The Motley Fool owns AstraZeneca and GlaxoSmithKline.

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Comments

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blackwhite 31 Jan 2012 , 4:00pm

Two, I hold myself.

then

Malcolm holds shares in Rolls-Royce, AstraZeneca, and GlaxoSmithKline.

Which is it, two or three?

TMFBoing 31 Jan 2012 , 4:06pm

It's only 2 of Mr Griffin's 8 - AstraZeneca is not one of his picks.

Alan
TMFBoing

blackwhite 31 Jan 2012 , 4:24pm

Of those, I hold WPP - because they seem to be doing well, are in a big acquisition mode and are going to be around for a long time or will get gobbled up by a Google or the like way into the future, thus outing value - and GSK because I like their consumer exposure on top of their pharma, serves this stock well in the global market.

Of the rest, only RIO, BG and RR are of interest, but they would need to drop further for me to buy them.

blackwhite 31 Jan 2012 , 4:25pm

Ah, thanks TMFBoing - long day at work and must have inhaled some of that smoke from the fire in West London... Must dash!

QuantumDealer 31 Jan 2012 , 9:51pm

AZN vs. GSK...

1. Margins significantly higher at AZN (GSK's are 1/3 of what they were 5 years ago)

2. Dividends are better covered at AZN 38% payout ratio compared to over 50% at GSK.

3. Pre-tax profits have more than halved at GSK in past 5 years.

Prefer BLT to RIO and yet I actually own both.

Own RR and BG Group. Reviewed WPP and watched it run away from my initial entry price. Same with Diageo...

MAACPRIME 01 Feb 2012 , 7:07am

I've thought about Astra, but I'm a little concerned about it being a drugs company that can't make new drugs. They're verly likely going to have to spend big to bring in new products and that's likely to be expensive and no guaranteed success.

ANuvver 01 Feb 2012 , 1:01pm

MAACPRIME:

re Astra, yes to all you've said.
But that cash pile. I don't just see short-term dividend security. I see a company with distribution and marketing clout and chequebook that's nicely positioned to reinvent itself as medicine moves into astounding new areas.

Imagine going to the GP in 20 years time and being told: "oh, it's just a spot of cancer, take these and rest up for a few days." 40 years on, there may well be no need for the pills.

Far-fetched? Maybe. But did you have a mobile phone 20 years ago?

AZN, GSK, BATS, DGE

RegDiversify 01 Feb 2012 , 1:43pm
RegDiversify 01 Feb 2012 , 1:47pm

AZN, GSK & BATS I hold. The reason for AZN is simply because the dividend is paid in Dollars, hence a hedge against currency fluctuations. BP is another but got trashed by someone who is seeking re-election.

richjfool 01 Feb 2012 , 3:26pm

Maybe we should be asking about the performance of the Fidelity MoneyBuilder Growth Fund.

Dozey1 01 Feb 2012 , 4:06pm

I tend to favour FTSE250 companies rather than lumbering giants, though GSK and BG figure in my portfolio. In fact BG is my largest holding (5.4%), but surely has a higher p/e than the 13.2 quoted. Sharescope has 19 at a price of £14.25, but that's academic as I am not selling anytime soon.
Interesting that the eight quoted shares produce a large slug of their profits overseas; ideal for widows and orphans perhaps.

ANuvver 01 Feb 2012 , 7:05pm

I've a feeling the next decade belongs to "widows and orphans"...

WarrenBuffer 02 Feb 2012 , 10:03am

I wonder how you can include a boring old utility (BG) paying only 1.5% dividend as a good buy.

Low dividends are for companies with excellent growth prospects.... at least Centrica pays 5% and National Grid 5.9%

WB

BIACS 02 Feb 2012 , 11:24am

QuantumDealer - you might want to investigate the nature of the supposed "profit decline" at GSK - this is due to a one-off legal settlement of 3bn. Sizeable yes, but a one-off and hardly evidence of a decline in business. I think you'll find profits nicely back up again this year...

Reckondite 02 Feb 2012 , 1:18pm

One PLC I will NEVER invest in is GSK as it's poorly tested drug Avandia nearly killed me. Also, when there was long running appalling hygiene at its Puerto Rico Plant the female exec who confirmed it was sacked by the Board.
In the US this and Avandia is still BIACS got endless lawsuits as elsewhere globally except the UK. Here no Drug Co has ever been made liable. Thaliadomide was a one off voluntary pay out. The gsk Board ought to be on trial for culpable manslaughter.

We really are like Zimbabwe; printing money and grabbing assets. Alistair Darling bribes Peter Cloakey with £4m to say Bradford and Bingley has no value despite Santander paying a bargain near £800m for the "good" bits and the rest still in credit. And neither Darling, the Board, or the Underwriters face any liability for the fraudulent Rights Issue so soon before this.
In the US they could not get away with this, but here we are "all in it together".

Frenske 02 Feb 2012 , 3:19pm

These companies all are safe bets and I expect one would gain little and also loose little in the future. These would have a good pick 3-4 months ago, but they are not on the cheap any more.

Perhaps somebody tries to push their share prices a bit more up. For sure, it is good to have some shares in stable companies like these but part of my money goes to high risk companies like SQZ and AUL.

QuantumDealer 05 Feb 2012 , 4:26pm

BIACS - it is only a "one off" until the next "one off'. Also, dividend growth has declined in each of the past 3 years and profit margins have declined in each of the past 4 years which is not great for a so-called defensive stock...pricing power for GSK clearly appears to be diminishing. Let's see how well they do when their numbers are announced on Tuesday this coming week...

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