"Healthy" Potential at Templeton
02/11/2005 12:00 am EST
Perhaps no organization is better known for its global investment approach than the Templeton Group. Jeffrey Everett, chief investment officer of the Templeton World and Templeton Foreign funds, looks worldwide for opportunity and now sees potential in the global drug sector.
"I would begin by noting that the G7 meeting in London this week included four countries that have never been there before – Brazil, Russia, India, and China. I think that speaks volumes regarding what the G7 leaders believe about the world economy – that it truly is a global world; investors need the horizon, time-wise and perspective-wise, to look at these opportunities. It should be no surprise then, that when we look at what we like at Templeton – where we have the luxury of being anywhere in the world we want - that we are 75% outside of the US. We see tremendous opportunities for some undervalued markets overseas.
"Our research network globally is really buzzing with a lot of values around the world. One of the big problems that investors have is that despite the fact that barriers have come down, there are still some markets where there are significant restrictions for foreign investors, such as Korea, India, and Taiwan. Hence, that’s where the best opportunities are. These barriers to entry are creating pricing inefficiencies. And that is where we see opportunity. From our perspective, looking for global values, they are out there, and quite a few of them are in emerging Asia.
"Yes, there has been a lot of euphoria about these markets. In a sense, previously, the world had one business school – the US. And now we are starting to see foreigners take the lessons they have learned here and go back to their home markets: the repatriation of intellectual capital – Chinese and Indians going home to run markets. I don’t think people understand the power of what this is doing to really turbo-charge those economies. It doesn’t necessarily make them good stock markets yet, but it makes them very interesting economies that we have to pay attention to.
"Aside from emerging markets, we are seeing opportunity in the global drug sector. We are not scared away from the drug stocks. Indeed, wherever there is controversy, you’ll find Templeton. In particular, we would point to Sanofi-Aventis (SNY NYSE) in France; GlaxoSmithKline PLC (GSK NYSE) in the UK; and Bristol-Myers Squibb (BMY NYSE) in the US. In these companies, we are finding very strong balance sheets – in fact, extraordinarily strong balance sheets - in stocks that have potentially been overlooked by investors. People are worried about patent expirations, patent challenges, etc. But when you look behind these concerns at the financials, it is very reminiscent to us of what we saw in 1999 and 2000 in the materials sector, when things such as copper, steel, and cement were out of favor. And that turned out to be the best place for investors to be at that time.
"Now, people have given up on drug stocks, and you are getting paid extraordinarily well. Bristol-Myers, for example, is like a Treasury bond with upside. You are getting paid 4.6% to wait. The dividend is $1.20, free cash flow is $1.20 per share, and debt on the balance sheet is $1.15 per share. In other words, free cash flow is more per year than the entire net debt position of the company. Again, this is an area where investors really haven’t focused. We see great profitability and great margins, while others are focusing on fears such as caps on pricing. But in our view, these fears are already priced into the stocks. Given the financials and the growth potential, we consider these drug stocks very undervalued."