Author: Aayushi Swami
Approach
The managers first generate ideas through a quality-growth screen, which includes companies with market caps of at least $3.5 billion, a good liquidity profile, and other metrics such as strong and improving margins. The team excludes non-growth industries such as utilities and looks for companies with solid returns on invested capital. Factors such as economies of scale, intellectual property, and legal or regulatory advantages are key. The team also places a heavy emphasis on culture, believing that culture drives certain companies forward and helps maintain their competitive edge. The team takes its best ideas and builds a relatively concentrated portfolio of roughly 30 to 40 international stocks. Because of their benchmark-agnostic approach, the portfolio may have extreme over- and underweighting to various sectors.
Portfolio
The managers use their best ideas to build a concentrated portfolio. . Coming out of the 2007-09 global financial crisis, the managers felt like their portfolio was too concentrated at about 20 holdings. They’ve gradually increased that count, and in July 2021 had 35 holdings. While still relatively concentrated (the typical foreign large-growth peer held 83 stocks in July), the expansion helps reduce individual stock risk. The managers take other prudent steps to minimize risk and remain relatively diverse. They avoid sectors that they believe offer little growth potential and as of July 2021, the fund had no exposure to energy, real estate, or utilities.
People
Co-CEO and manager Kurt Winrich’s upcoming retirement has been long in the works and the team will still have four capable managers to pick up the slack. Mike Trigg, who has been on the strategy since the fund’s 2011 inception, is the final decision-maker here. . Peter Hunkel, who has also managed since the fund’s inception, is responsible for portfolio construction. The team promoted Sanjay Ayer, also a former Morningstar equity analyst, to the management ranks in June 2019. Ayer joined WCM in 2007 and manages the WCM Global Growth Fund WCMGX and the WCM Emerging Markets Fund WCMEX, which have had success under him. Paul Black, co-CEO of WCM, is a named manager here but serves mainly as an advisor to the team.
Performance
Strong stock selection has fueled the fund’s outperformance. Picks in technology and industrials, in particular, have been among the biggest contributors to its performance. That helped the strategy weather 2020’s first-quarter coronavirus-driven slide. The fund held up slightly better than the index losing 29.4% from Jan. 18 to March 23, 2020, compared with the index’s 30.3% loss. The managers then opportunistically added MercadoLibre MELI and Ferrari RACE, which benefitted the strategy coming out of the bear market. In 2021, the fund has returned to its winning ways. Its 12.7% return handily beat the index’s 4.6% and the Morningstar Category’s 4.5%. That was good for the top decile in the category. Holdings such as ASML Holdings NV ADR ASML and Shopify SHOP were among the leading contributors in that period.
About the Fund
WCM Focused International Growth Fund seeks long term capital appreciation by investing in equity securities of non-U.S. domiciled companies or depository receipts of non-U.S. domiciled companies.
(Source: Morningstar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Investment Thesis:
- In our view, considering the quality of the business, EQIX is trading at fair valuation (from the perspective of trading multiples, dividend yield and our DCF valuation).
- Attractive long-term outlook in global digitization and data requirements of companies, with 5G and cloud computing as key drivers.
- Businesses moving away from on-premise centres towards colocation and cloud networks.
- Diversified client base and revenue stream minimises contractual risk.
- Opportunity for future market share expansion via potential acquisitions.
Key Risks:
- Increases to operating expenses – particularly electricity costs. However, the contracts between Equinix and its customers provide for rights and protection clauses to permit the Company to pass on electricity cost increases that exceed 5%.
- Rising technology and acceptance of cloud-based services may incentivise businesses to fully leverage cloud infrastructure rather than connecting with IBX data centres. However, management has downplayed these concerns, stating that there must still be direct interconnection between Cloud and businesses within the data centres.
- Newer IBX data centres have twice the cooling needs as old centres. Potential power limitations could force the company to have a lower utilization rate of its cabinets.
- Increased competition in the industry from the likes of Google, Apple, Microsoft and Digital Reality Trust, and the possibility of formation of strong strategic alliances amongst competitors
- EQIX is subject to exchange rate risk due to the company’s diverse geographical scale of operations. However, the company hedges many of these exposures.
- REIT classification mandates a minimum of 90% of taxable income paid to shareholders. This may hinder EQIX’s ability to increase its cash via retained earnings and could render the company’s balance sheet inflexible.
Key highlights:
- Over the quarter, revenues up +8% to $1.7bn, adjusted EBITDA up +7% and AFFO was ahead of management’s expectations.
- Strong quarterly result, with revenues up +8% to $1.7bn, adjusted EBITDA up +7% and AFFO growth of +10% (normalised and constant currency) was ahead of management’s expectations.
- Interconnection revenues grew +12%
- On a normalized and constant currency basis, Americas’ revenue growth of +8% YoY was among the highest in as many quarters. Adjusted EBITDA of $326m was up +3%.
- Asia-Pacific reported normalized and constant currency revenue up +11% YoY and normalised MRR up +9% YoY, with management noted MRR growth was partially impacted by Covid related constraints in Singapore and political uncertainty in Hong Kong.
- Total gross debt at the end of the quarter was $11.8bn, with weight average borrowing costs of 1.72% (95% of the debt is at fixed rate) and weight average maturity of debt 9.6 years.
- Net leverage ratio at the end of the period was 3.8x
Company Description:
Equinix (NASDAQ: EQIX) is a leading company in internet connection and data centres. It is the global market leader in colocation data centre industry, providing data services and platforms for over 9800 companies across 24 countries. This allows companies to connect to their online ecosystem and meet their interconnection needs for their business operations. EQIX also offers additional solutions such as the Equinix Cloud Exchange Fabric to connect data centres to cloud networks, and the recently introduced Equinix SmartKey to offer encryption protection for the data security management of companies.
(Source: Banyantree)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Investment Thesis
- High barriers to entry.Strong strategic position in the rapidly growing global smartphone market especially with high end consumers. Loyal consumer base resulting in lower competitive pressure, and higher pricing power.
- Large cash balance and strong free cash flow supporting share buyback and dividend payout.
- Leading positions in iPhone; iPads; and Macs.
- Services segment remains on track to double FY16 revenue by FY20.
- In terms of Other products (such as wearables and home products), AAPL seized the leading position off the back of a surge in smartwatch sales in a market expected to grow single digit till 2022 and double digit thereafter.
- Strong senior executive team reducing (not totally eliminating) key man risk.
Key Risks
- Geo-political tensions. The current trade war between the US and China pose a threat to the company’s future profits. AAPL currently obtains components from single or limited sources (mostly China), the Company is subject to significant supply and pricing risks. Also, Greater China is a major market contributing to approximately 21% (Q218) of total revenue and any retaliatory efforts from Beijing could impact those sales.
- Whilst there are only a handful of competitors, the competition is Intense from Android manufacturers. The most notable competitors in the smartphone market (which contributes 62% of Apple’s revenues) are the Korean giant Samsung and two rapidly growing Chinese smartphone players in Huawei and Xiaomi. On raw performance specs (i.e., camera, maps, screen size, charge time, etc.), one may assert that AAPL devices are technically inferior to a handful of Android devices.
- Movements in U.S. dollar (USD). The greenback’s strong gain recently (due to rise in U.S. interest rates and moderating growth in other parts of the globe) has seen it rise to the highest level in nearly seven months, meaning foreign currency earnings of AAPL can be worth less when translated back to USD. The weakness in foreign currencies relative to USD will have an adverse impact on net sales during 2018.
Key highlights to 4Q18 results
- 4Q18 revenue of $62.9bn, up +20% from the year-ago quarter, and quarterly diluted EPS of $2.91, up +41%, driven by record sales and strong momentum for iPhone, Wearables and Services. On the conference call, management highlighted “[revenue] was ahead of our expectations. That’s an increase of 20% over last year and our highest growth rate in three years”.
- Gross margin was 38.3%, flat sequentially, in line with management’s expectations, as leverage from higher revenue offset seasonal transition costs.
- International sales (61% of the quarter’s revenue) was strong, especially in Japan, up +34%, Rest of Asia Pacific, up +22%. The Americas (44% of revenue) saw revenue of $27.5bn, up +19%, whilst Europe at $15.4bn, was up +18% and China was up +16% at $11.4bn.
- Services revenue reached an all-time high of $10.0bn. Excluding a one-time favorable adjustment of $640m (in 4Q17), Services revenue grew from $7.9bn to $10bn, up +27% over the pcp.
- By product, iPhone, Services and Other products saw 29%, 17% and 31% sales growth, respectively, whilst disappointingly, iPad and Mac saw -15% and 3% sales growth respectively.
- iPhone ASP was $793 compared to $618 a year ago, driven by strong performance of iPhone X, 8 and 8 Plus, as well as the successful launch of iPhone XS and XS Max in the September quarter this year, while we launched iPhone X in the December quarter last year.
Company Profile
Apple Inc. (AAPL) designs and manufactures media devices and personal computers (Macs), and sells a variety of related software, services, accessories, networking solutions and third party digital content and applications. The company leads the world in innovation with iPhone, iPad, Mac, apple watch and Apple tv.
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.