Finding Small/Mid Cap Diamonds in the Rough

Transcription

1 2016 Franklin Templeton Advisor Forum Finding Small/Mid Cap Diamonds in the Rough Edwin Lugo, CFA Senior Vice President, Portfolio Manager Franklin Equity Group Pankaj Nevatia, CFA Vice President, Portfolio Manager/Research Analyst Franklin Equity Group CFA and Chartered Financial Analyst are trademarks owned by CFA Institute. For Dealer Use Only. Not for Distribution to the Public.

2 Valuations: Small Cap vs. Large Cap Price/Earnings 2016 Price/Book 2016 Large Cap Indices MSCI World Index MSCI EAFE Index Russell 1000 (US) Index MSCI Europe Index Index MSCI Asia Ex. Japan Index MSCI Japan Index Index Small Cap Indices MSCI World Small Cap Index MSCI EAFE Small Cap Index Russell 2000 (US) Index MSCI Europe Small Cap Index MSCI Asia Ex Japan Small Cap Index MSCI Japan Small Cap Index Source: Bloomberg, MSCI. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. The Russell index shown is a trademark/servicemark of the Frank Russell Company. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges. Important data provider notices and terms available at For Dealer Use Only. Not for Distribution to the Public. 1

3 Attractive Valuations on Quality Shipping Companies Given Supply/Demand Mismatch Baltic Dry Index (BDI) January 3, 2000 to May 2, /2/16 Source: FactSet, BIFFEX The Baltic Exchange. Important data provider notices and terms available at For Dealer Use Only. Not for Distribution to the Public. 2

4 Opportunities in Equipment & Services Companies with Reduced Mining Capex Global Mining Capital Expenditures From 2000 to 2017E USD Bn E 2016E 2017E Source: Kepler Cheuvreux (from a report titled Capital Goods: Mining Capex Back to 2005 Levels ). There is no assurance that any projection, estimate or forecast will be realized. For Dealer Use Only. Not for Distribution to the Public. 3

5 Valuations on Energy Stocks are Attractive with Oil Prices at less than 1/3 of 2008 Highs WTI Crude Oil (NYMEX) January 3, 2000 to April 29, 2016 (Daily) 4/29/16 Source: Kepler Cheuvreux (from a report titled Capital Goods: Mining Capex Back to 2005 Levels ). For Dealer Use Only. Not for Distribution to the Public. 4

6 Case Study: Amec Foster Wheeler Plc Leading provider of engineering, project management and consultancy services Long-Term Competitive Advantage Market Leadership Positions Market leadership position in several niche categories ( 30% share in North Sea MMO sector; 50% share in nuclear facilities management in the UK) Low risk cost-plus contract base (~75% of revenues) Diversified end-market exposure (Oil & Gas - 55% of revenues) High recurring revenues with ~55% related to maintenance Long history of successful contract execution Quality Balance Sheet Balance sheet de-risked with the increase in covenants and extension of debt maturity High free cash flow generation even in this depressed market environment Minimal capex requirements (<0.5% of sales) Valuation/Risk Attractive Cash Flow Generation Company likely to generate at least ~ million in free cash flow even in a $35-$40 oil environment, resulting in a ~9%-10%% FCF yield at the time of purchase. Potential for significant free cash flow improvement through cost reduction efforts already underway Risks: Worsening of the oil & gas downturn, further increase in debt and missteps by the new CEO Source of data: Company, Franklin Templeton. As of 12/31/2015 unless otherwise noted. The case studies shown represent certain examples of the portfolio managers ( investment manager ) best performing investments and other investments made by the investment manager, which were not as successful or that lost money, are not shown. The investments may or may not be currently held by portfolios managed by the investment manager. The case studies are not representative of the overall performance of the portfolios managed by the investment manager as is demonstrated by those portfolios past performance numbers. Past performance does not guarantee future results and results may differ over future time periods. These case studies are being shown only as examples of what the investment manager is seeking to achieve in managing the portfolio, but are not necessarily indicative of what has actually been achieved with all of the investments or will be achieved going forward. This is not a complete analysis of every material fact regarding an industry, security or investment and should not be viewed as an investment recommendation. The actions taken with respect to these investments, and their performance, may not be representative of other advice or investments. Factual statements are taken from sources considered reliable, but have not been independently verified for completeness or accuracy by the composite s manager or its affiliates. These opinions may not be relied upon as investment advice or an offer for a particular security or as an indication of trading intent for any portfolio. References to particular securities are only for the limited purpose of illustrating general market or economic conditions and are not recommendations to buy or sell a security or an indication of any portfolio holdings. For Dealer Use Only. Not for Distribution to the Public. 5

7 We Seek Opportunities with Greatest Return Potential for the Least Amount of Risk I like to shoot fish in a barrel, but first I like to take the water out Warren Buffett Banks 2007 Corp Bonds 2008 Treasuries 2014 MBS 2007 Equities 2008 Return Less Return More Risk Oil 2008 Return Eurozone 2010 More Return Less Risk Oil 2015 Fundamental Risk Fundamental Risk * Linear for demonstration purposes only Source: Franklin Templeton. For Dealer Use Only. Not for Distribution to the Public. 6

8 We Seek Opportunities with Greatest Return Potential for the Least Amount of Risk No Risk Perfect Arbitrage High Confidence Probability of Win = High Net Cash > Market Cap Cyclically Depressed Franchise at a Reasonable Price Growth for Free Mispriced Assets Undervalued Cashflow Binary Situations High Risk Unknown Value No Confidence Probability of Win = Low Assumption Dependent Source: Franklin Templeton. For Dealer Use Only. Not for Distribution to the Public. 7

9 Idea Generation Wherever, Whenever W Hotel SCREENING INTERNAL PROPRIETARY WORK Criteria aligned with investment approach EV/EBITDA, ROE, Debt/Equity 52-weeks highs/lows Cash on Balance Sheet> Market Cap Articles/websites Sell Side conferences Company visits & management meetings Spinoffs FRANKLIN EQUITY GROUP PLATFORM Franklin Global Large Cap Equity Team Franklin US Equity Team Franklin European Equity Team Source: Franklin Templeton. For Dealer Use Only. Not for Distribution to the Public. 8

10 Insurance an Opportunity to Invest in Quality Companies at Attractive Valuations Price/Book Valuations on Insurance/Reinsurance Companies March 1994 through March Price-to-Book /94 3/95 3/96 3/97 3/98 3/99 3/00 3/01 3/02 3/03 3/04 3/05 3/06 3/07 3/08 3/09 3/10 3/11 3/12 3/13 3/14 3/15 3/16 Source: SNL Financial, FactSet, MSCI. Important data provider notices and terms available at For Dealer Use Only. Not for Distribution to the Public. 9

11 Fluctuating Valuations in EM Create Opportunity, but Developed Markets Remain Focus MSCI Emerging Markets Index Price to Earnings 2000 to May x Price-to-Earnings x x Current 05/16 Source: SNL Financial, FactSet, MSCI. Important data provider notices and terms available at For Dealer Use Only. Not for Distribution to the Public. 10

12 Case Study: Irish Continental Group PLC Leading Ferry Operator Between Ireland-UK-Europe Long-Term Competitive Advantage Attractive Competitive Dynamic Short route on Irish Sea a duopoly given limited berths Shorter route provides time/cost advantage vs. peers with longer route Barriers to Entry on Container Terminals Has existing well placed terminals in Dublin & Belfast New terminals would require substantial time and investment from competitors if they could get access to location Quality Strong Balance Sheet Very small net debt position of 0.1x EBITDA at 12/2010 Investment period concluded, minimal cap ex over next 10-years 300m value of ferries = ~77% of the market cap of company Valuation/Risk Attractive Cash Flow Average free cash flow of ~ 46 million from resulted in ~10% free cash flow yield during poor economic environment Forward P/E of 12.2x vs. our sell target with P/E above 20.0x Given weak economic environment, saw potential for increased revenues and margins with improvement Source of data: Company, Franklin Templeton. As of 12/31/2010 unless otherwise noted. The case studies shown represent certain examples of the portfolio managers ( investment manager ) best performing investments and other investments made by the investment manager, which were not as successful or that lost money, are not shown. The investments may or may not be currently held by portfolios managed by the investment manager. The case studies are not representative of the overall performance of the portfolios managed by the investment manager as is demonstrated by those portfolios past performance numbers. Past performance does not guarantee future results and results may differ over future time periods. These case studies are being shown only as examples of what the investment manager is seeking to achieve in managing the portfolio, but are not necessarily indicative of what has actually been achieved with all of the investments or will be achieved going forward. This is not a complete analysis of every material fact regarding an industry, security or investment and should not be viewed as an investment recommendation. The actions taken with respect to these investments, and their performance, may not be representative of other advice or investments. Factual statements are taken from sources considered reliable, but have not been independently verified for completeness or accuracy by the composite s manager or its affiliates. These opinions may not be relied upon as investment advice or an offer for a particular security or as an indication of trading intent for any portfolio. References to particular securities are only for the limited purpose of illustrating general market or economic conditions and are not recommendations to buy or sell a security or an indication of any portfolio holdings. For Dealer Use Only. Not for Distribution to the Public. 11

13 Case Study: Irish Continental Group PLC Irish Continental Group Plc Stock Price ( ) May 2010 through May /10 9/10 1/11 5/11 9/11 1/12 5/12 9/12 1/13 5/13 9/13 1/14 5/14 9/14 1/15 5/15 9/15 1/16 5/16 Source: FactSet, MSCI. Important data provider notices and terms available at For Dealer Use Only. Not for Distribution to the Public. 12

14 Inefficiencies in the Global Small Cap Universe Have Led to Above Average Returns MSCI World Small Cap vs. MSCI World Index: Cumulative Total Return (USD) From May 1996 to April Return (USD) MSCI World Small Cap: 7.76% p.a. MSCI World: 6.32% p.a /96 10/97 03/99 08/00 01/02 06/03 11/04 04/06 09/07 02/09 07/10 12/11 05/13 10/14 03/16 04/30/16 MSCI World Index MSCI World Small Cap Source: Bloomberg, MSCI. MSCI makes no warranties and shall have no liability with respect to any MSCI data reproduced herein. No further redistribution or use is permitted. This report is not prepared or endorsed by MSCI. Important data provider notices and terms available at For Dealer Use Only. Not for Distribution to the Public. 13

15 Legal Disclaimers The information presented herein is considered reliable at the present time, however, we do not represent that it is accurate or complete, or that it should be relied upon as such. Speculation or stated beliefs about future events, such as market or economic conditions, company or security performance, upcoming product offerings or other projections represent the beliefs of the speaker and do not necessarily represent the views of Franklin Templeton Investments. General business, market, economic and political conditions could cause actual results to differ materially. The information presented is not a recommendation or solicitation to buy or sell any securities. Please read the prospectus or fund facts document before investing. Additional information about the Funds is available in the Funds annual information form, management reports of fund performance and financial statements. You can get a free copy of any or all of these documents, from your dealer, by calling toll-free or by contacting us at service@franklintempleton.ca. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are historical annual compounded total returns including changes in share value and reinvestment of all dividends and do not take into account sales, redemption, distribution or optional charges, income payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. For Dealer Use Only. Not for Distribution to the Public.

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