In this section, we feature a few Company Spotlights – either new ideas recently added to our portfolios, or updates on some existing holdings.
We hope these features help you understand how our analysts and portfolio managers recommend stocks to purchase. Each quarter, we'll post several in-depth spotlights here for your review. Portfolio holdings are subject to change, and for specific information about portfolio composition as of the most recent quarter-end, please refer to the specific Fund or Product you are interested in.
|
Carnival Corp. is the world’s leading cruise operator with 40% market share globally and 50% market share in North America. Carnival operates under 11 distinct brands globally including Carnival Cruise Lines, Princess Cruises, Holland America Line, Seabourn Cruise Line, Costa Cruises, Cunard Line, P&O Cruises, Ocean Village, Ibero, AIDA and P&O Cruises Australia. Under these brands, Carnival operates 97 ships carrying approximately 200,000 guests at any given time. Across the company’s various cruiselines, Carnival attracts nearly 8.5 million guests annually. Its global presence will continue to grow with the company taking delivery of an additional 10 new ships through May 2014. Choppy Economic Conditions
In 2009, Carnival saw its worst pricing environment in decades, even worse than post 9/11, and the weakness has weighed on Carnival stock. Some investors speculate this difficult environment will continue as consumers with less money to spend will cease taking vacations. We believe vacations are not viewed as a luxury, but rather a necessity. As such, individuals will continue to find ways to escape from everyday life. Additionally, cruising is a cheaper alternative to comparable quality land-based travel. The cost of a cruise vacation has become even more affordable because of the increased number of departure ports, meaning travel expenses are lower (sometimes eliminating airfare completely).
Superior Balance Sheet
Carnival’s fortress-like balance sheet, industry-leading capital allocation and profitability have enabled the company to distance itself from the competition. In today’s difficult credit environment, Carnival is able to purchase new ships without borrowing, whereas its competitors must rely on third parties to finance their purchases, which puts them at a structural disadvantage.
Best Captain in Cruising
Micky Arison, Carnival’s CEO, literally grew up in the industry. He started in Carnival’s sales department, served as reservations manager in 1974, became vice president of passenger traffic in 1976, and moved up to president in 1979. In 1990, Micky took over as CEO of Carnival Cruise Lines from his father who built Carnival into a global leader from scratch. Given his long tenure in the industry, Micky has proven himself an innovator. An additional bonus for shareholders is Micky thinks like a shareholder, after all, he owns nearly 30 percent of Carnival. We are comfortable being in the same boat with Micky for the long run.
Intriguing Valuation
With the current clouds hanging over the stock, Carnival trades near 13x the company’s anticipated fiscal year earnings. We view this as very compelling for a dominant industry leader with a recognized brand and solid balance sheet. The market has gotten so negative on the stock that it is currently valuing the company below the replacement cost of its current fleet. As of June 30, 2010, shares traded at $30.24, a 41% discount to our steadily growing private market value of $50.97.
Carnival Corporation (NYSE: CCL)
3655 NW 87th Avenue
Miami, FL 33178
305-599-2600
carnival.com
|
Hospira, Inc., spun out of Abbott Laboratories in 2004, is a diversified health care products company. The company develops injectable pharmaceuticals, manufactures branded injectable products for pharmaceutical companies and creates medication delivery products. Many of its products focus on increasing efficiency and safety within hospitals, nursing homes, home care agencies, and rehabilitation centers. Some of Hospira’s products are: infusion pumps; intravenous (IV) sets; IV solutions; pre-filled injectable oncologic pharmaceuticals; and pre-filled injectable antibiotics.
Innovation Maintains a Wide Moat
Hospira’s business has high barriers to entry. First, injectable pharmaceuticals are far more complex to manufacture than pills. The solubility of different pharmaceutical ingredients and stabilization of those products in liquid form vary greatly. Second, Hospira has proprietary packaging technology that decreases medical errors through bar-coding and software, increases efficiency in product delivery through easy-use syringes, and decreases product waste. Third, manufacturing these complex products is heavily regulated. Some facilities must be sterile, for instance, and approved by the Food and Drug Administration for a particular product only. As such, Hospira’s facilities are costly to operate and can therefore take years to receive manufacturing approval. Finally, Hospira is currently the only American manufacturer to launch a biosimilar in Europe. As you may know, a biosimilar is a generic biologic. With billions of dollars of biological products losing patent protection in the coming years globally, this innovative product should offer Hospira another highly competitive advantage.
Biosimilar Opportunity
Biotech revenues are about $90 billion worldwide and growing 12% annually. Hospira has launched the biosimilar product of Epogen (EPO) in Europe. This launch is a highly strategic and first-to-market venture, as many countries currently do not have an approval process or “pathway” for a biological drug to have a generic drug as chemical pills do today. Europe was the first region to offer a pathway for biosimilar drugs. Biosimilars are highly complex and require an extremely high level of expertise. This is potentially a large opportunity for Hospira as biosimilars are rolled out worldwide in the coming years. Other countries are looking and learning from Europe’s experience in launching biosimilars as a means to implement a pathway within their own countries. The driver of this biosimilar focus is to lower the cost of these highly expensive, fast growing health care products. This remains an extremely controversial topic within the U.S. as the details to a product approval or “pathway” are still being debated.
Solving a Big Problem
As the population ages, many know health care costs are rising to unsustainable amounts globally. Hospira’s products offer an answer to this growing problem since generic injectables cost less than the branded products. In addition, Hospira’s proprietary products lower hospital labor costs by increasing nursing productivity. Finally, the technological advances and product safety features lower medical errors, thereby saving the entire health care system both lives and costs. As of June 30, 2010, Hospira shares traded at $57.45, an 11% discount to our private market value of $64.33.
Hospira, Inc. (NYSE: HSP)
275 North Field Drive
Lake Forest, IL 60045
224-212-2000
hospira.com
|
Founded in 1945, Mattel, Inc. has grown into the world’s largest toy manufacturer with more than $5 billion in sales. From Barbie to Hot Wheels, Mattel controls great brands that have been popular for generations. Starting with Fisher-Price, children play with Mattel products from infancy all the way into their teens. While the company is best known for its girl-focused brands, including Barbie, American Girl and Polly Pocket, it also owns iconic boy-focused brands such as Hot Wheels and Matchbox.
The Power of Nostalgia
For parents buying toys for their children, Mattel products are familiar, wholesome and trustworthy. Parents fondly remember playing with Barbie’s Dream House or Matchbox cars and want their children to experience the same joy. Other companies entrust their properties to Mattel precisely because the company has guarded its franchises so well. For example, Disney, which is famously protective of its brands, enlists Mattel to produce toys for Disney Princesses, Toy Story, Pixar’s Cars, and more.
Digital: Threat or Opportunity?
As children’s attention has increasingly been drawn to video games, the Internet and cell phones, investors question whether Mattel can remain relevant in a digital world. While its largest competitor, Hasbro, has pursued a broader media strategy—including movies and a 50% stake in a new cable network—Mattel remains focused on toys. Some of Mattel’s brands have made major movie appearances—Barbie and Ken star in Toy Story 3, for example—and we expect to see these opportunities increase in the future. In introducing their newest doll franchise, Monster High, Mattel produced a series of animated videos about the characters to demonstrate the versatility of the brand. Furthermore, with nearly half of sales coming from international markets, the company has proven its brands have global appeal. In developing markets, the affordable cost of dolls and toy cars appeals to lower-income consumers, while in developed markets more elaborate and expensive toys are in higher demand.
Long-Term Leadership
Led by CEO Bob Eckert for the past 10 years, Mattel’s leadership team has demonstrated an ability to manage the company in any environment. With his prior experience as CEO of Kraft Foods, Eckert brings an extensive understanding of consumers to Mattel. This management team has demonstrated an ability to reinvigorate brands, as it has updated Hot Wheels and Polly Pocket, while focusing on the brands that matter most. And rather than try to create the hot new toy of the season, they are focused on developing franchises that pay off over the long term. As of June 30, 2010, shares traded at $21.16, a 30% discount to our private market value of $30.07.
Mattel, Inc. (NYSE: MAT)
333 Continental Boulevard
El Segundo, CA 90245
310-252-2000
mattel.com
|
|
|
