Three Investment Ideas: Henkel, Swatch, Weir

Christopher Rossbach presented his in-depth investment thesis on Three Investment Ideas at European Investing Summit 2014.

Henkel: leading German consumer goods and adhesives company, with revenues equally divided between the two businesses. It is the world leader in adhesives and a European leader in home and personal care. Henkel’s share price does not reflect its significant sales, earnings and cash potential. The equity is mispriced as the market has not adequately reflected the opportunity for the adhesives business to substantially increase its earnings with a recovering global economy and increased use of adhesives in cars, buildings and general industry. The European HPC business has moderate growth prospects but significant restructuring potential. Rossbach thinks Henkel’s ordinary shares, which trade at a 10% discount to the preference shares, are worth €100. The market puts the discount on the ordinary shares because they are less liquid (held in large part by the Henkel family), a fact which should not bother long term investors.

Swatch: world’s largest watch maker with a 25% market share. Its brands range from Breguet, Blancpain and Omega, to Tissot and Longines, and to Calvin Klein and Swatch. 50% of watches sold are in Asia, of which 37% in China. Tissot and Longines are the two top watch brands in China. Nicolas Hayek, the founder of Swatch, was instrumental in turning watches from utilitarian time keeping devices into aspirational objects and jewelry. In particular, a watch is the only jewelry most men will ever wear. Swatch has many years of growth from volume and from pricing. Europe is fully penetrated so it is about pricing, but the U.S. has a long way to go and China—despite its share of Swatch’s sales—has only gotten started. Swatch’s share price is depressed because of concerns about China and the Apple Watch, which has yet to be sold and will have an impact; but it is a different product. Swatch is worth CHF140 as its sales and earnings grow, demand in China and other emerging markets comes back, and the Apple Watch turns out to be a good product with limited appeal. On a 2015 estimated P/E of 13x none of that is priced in. Rossbach makes the case for the registered shares, which are 8% cheaper than bearer shares.

Weir: leading supplier of industrial pumps and valves for the global mining, oil & gas and power markets, with 30%+ share in its individual segments and 65% of sales from aftermarket. Weir’s share price does not reflect the strength of its franchise, potential for structural growth (as demand for non-conventional oil and gas exploration expands from the U.S. to other markets), resilience of its recurring revenues from aftermarket, and pricing power as its pumps are critical for production, yet are a fraction of total costs. Given that Weir’s P/E multiple is moderate for a company of such quality and is in line with its ten year average, Rossbach thinks Weir has material upside to £30+ per share.

About the instructor:

Chris is Managing Partner of the London-based family office, J. Stern & Co. Established to provide investments for the Stern family, it is devoted to long-term investments for families with a multi-generational approach. J. Stern & Co. builds on the Stern family’s 200 year old banking tradition with a conservative approach and institutional-level analysis and resources. It manages bespoke concentrated global equities portfolios following a strict value approach, based on its own proprietary analysis, with a long-term investment horizon. Prior to co-founding J. Stern & Co., Chris had senior investment roles at Merian Capital, Magnetar Capital, Lansdowne Partners and Perry Capital. Chris holds a BA from Yale University and a MBA from Harvard Business School.