Persistent readers of The Twenties Trader will know my investing ethos is to look for quality businesses at reasonable prices. Some of these businesses will be consistent compounders that can grow in any environment that, for one reason or another, have been marked down unfairly, allowing us to swoop in and pick up a handful of shares at a discount. Other opportunities will be found in quality cyclicals, where a specific catalyst may be set to drive results higher over the next year or two.
There is no question that markets are currently at elevated levels, especially international markets such as the US and in some pockets of Western Europe. However, I think value still can be found in specific areas. Here are a few of my good value international stock ideas for 2022.
Garmin is an American technology company focused on products related to GPS (global positioning services). Garmin, initially named ProNav, was founded in 1983 by Gary Burrell and Min. H. Kao to develop GPS products for the US military. They shortly renamed the business 'Gar'-'Min' to reflect the first three letters of both names.
Garmin's success was a true product development story, and by the year 2000, Garmin had sold over 3 million GPS devices and was making 50 different models. Garmin listed on the stock market in 2000 and subsequently acquired various businesses that would be well suited to its GPS offerings.
Today, Garmin splits itself into five specific business units, which it produces and markets GPS and other applied technologies for. These units are fitness, outdoor, marine, aviation and auto. Garmin's largest unit today, the fitness segment, incorporates popular products such as fitness trackers and specialist sports trackers.
Garmin has had a couple of good years as a result of the pandemic, which has driven increased demand for its outdoor products and fitness trackers. However, there are reasons to believe Garmin can still have a good 2022.
In the third quarter (and latest reported quarter) this year, Garmin raised its full year 2021 outlook, citing continued demand for its fitness and outdoor segments and a rebound in performance for both aviation and marine. With five separate business units, Garmin is able to flex its strengths towards sectors that are experiencing faster growth, which is likely to be aviation and marine GPS Systems as we emerge from the pandemic.
Product innovation is part of Garmin’s DNA. In the last year, Garmin has released a slew of new products and partnerships with other technology companies. Some set for launch in 2022 are:
Smart Glide — Safety technology that helps pilots glide optimally to the nearest airport in the event of engine failure.
Connect IQ — Partnership with Dexcom to deliver real time glucose information on Garmin smartwatches and cycling computers. The President, CEO and Director of Garmin, Clifton Albert Pemble, stated “Connect IQ is a very versatile platform. That allows people to tap into … the best hardware-based platform for wearables and purpose-driven devices that we have in cycling and outdoor [products] … It’s a great asset for us, and we’re constantly working on new opportunities to showcase Connect IQ apps with our devices”.
Surround View — Industry first intelligent camera providing a 360 birds eye view for marine vessels.
Garmin touchscreen — Partnership with Malibu boats to include a seven-inch Garmin touchscreen display across Malibu Axis boat line.
Financially speaking, Garmin has been in great shape too. Revenue growth has averaged high single digits over the last 5 years and strong operating margins also prevail, typically in the 22-24% range. Garmin has low debt and a strong balance sheet.
Garmin has fallen 25% from its September 2021 highs and now trades for 21x forecast earnings in 2022.
IPG Photonics is the inventor of high-power fibre lasers and is the world's leading producer of fibre laser technology. IPG is traded on the Nasdaq and is headquartered in Massachusetts.
IPG manufactures the broadest portfolio of fibre lasers in the industry, which are used in industrial, semiconductor, instrumentation, medical, scientific, defence and entertainment applications. Its technology is used to make products such as automobiles, aircraft and rail cars (made with robotic laser welding), razor blades and smartphones, and magazines and consumer electronics with printing produced by its marking lasers. Increasingly, IPG’s lasers are also being used for other diverse applications that include laser-based digital cinema projection, dental and surgical procedures, broadband communications, directed energy, and metal-based 3D printing.
One of the opportunities for shareholders in IPG is that there is considerable ‘white space’ ahead of the business to grow into. The market for cutting materials and industrial applications where laser tools could be used is huge. According to the graph below estimated by Oxford Economics and IPG, the total applications for both non laser and laser tools sits at $100bn.
IPG estimates their addressable share of this market, with laser systems, to be around $13bn. As the market leader in fibre lasers, IPG is likely to grow into this addressable market with its largest portfolio of industrial laser machines in the world. With current revenues of $1.5bn (2019) there is plenty of growth ahead of IPG.
I find IPG interesting as its products are used in many end markets that have been significantly affected by supply chain issues during the Covid-19 pandemic. Post-pandemic, I anticipate an increase for industrial demand, as companies begin to deal with supply chain issues and increase production, thus boosting IPG.
IPG has some ‘quality’ aspects to its business. It has a healthy operating margin of 24% (which is much higher than your typical industrial company) and is set to grow its top line at high single digits over the next three years. However, it does carry one risk. IPG was founded by its former CEO Gapontsev Valentin Pavlovich, who stepped down as CEO in April 2021 and died in October 2021. His estate still owns roughly 29% of the Company.
The Company losing its Founder and CEO could spark concern. However, he has been succeeded by Eugene Shcherbakov, who previously served as the Company’s Chief Operating Officer from February 2017. Prior to this, Shcherbakov served as the Technical Director of IPG Laser and has a background as a senior scientist in fibre optics.
Whilst the Covid-19 crisis significantly impacted IPG’s end markets, the business looks to be recovering and its last two quarters showed much positivity. In Q2’21, IPG’s revenue increased 25% year-over-year to $372 million, with an operating margin of 24.8% compared to 15.9% the year prior. Gross margin remained high, at 48.6% compared to 46.0% the year prior. In Q3’21, IPG reported one of its highest quarterly revenues in the Company’s history. Third quarter revenue of $379 million increased 19% year-over-year. With gross margin increasing slightly from the prior quarter to 49.0% and operating margin increasing to 26.9%, from 24.8% in the prior quarter and 13.0% from Q3’20.
On a geographical basis, the Company is currently facing problems in China due to lower revenue in cutting applications. This lower revenue is due to continued moderated demand driven by widespread supply chain issues, high shipping costs and power shortages, as well as more aggressive price competition from local manufacturers. IPG are currently moving away from the highly competitive, more cyclical cutting market in China, and will continue to do so over the near-term.
In its most recent third quarter, sales increased 50% in Europe and 55% in North America, and decreased 7% in China on a year-over-year basis. This ongoing weakness in China during the quarter led the Company to deliver a more cautious outlook for its fourth quarter.
Despite the recent pressure on IPG’s business in China, I remain excited by IPG and its future prospects. The addressable market for IPG is large, as manufacturers look to replace cutting equipment with superior technology such as that of IPGs fibre lasers. It’s tough to find industrial businesses with superior operating metrics, and IPG certainly cuts the mustard in this aspect.
The Laurent-Perrier Group is listed on the Paris Stock Exchange. It is a family-owned Champagne house, currently owned by the de Nonancourt family, who have owned the business since 1939. Marie-Louise de Nonancourt, a widowed mother of four, purchased Domaine Laurent-Perrier from Mathilde-Émilie Perrier, the widow of cellar master Eugène Laurent, in 1939.
Marie-Louise then passed the business down to her son Bernard de Nonancourt upon his return from fighting in WWII, who, after completing an intensive apprenticeship from vineyard to cellar, became Chairman and Chief Executive of the brand in 1948. In 1999, the brand listed on the Second market of the Paris stock exchange and Bernard de Nonancourt’s two daughters, Alexandra Pereyre and Stéphanie Meneux, joined the Laurent-Perrier management board. After Bernard’s death in 2012, his daughters became co-Chief Executive Officers of the Company.
I have chosen to include Laurent-Perrier Group in this article due to the performance of the art, luxury spirits and wine sectors in 2021. During 2021, alternative asset classes posted a vintage year of gains, with prices rising as low yields in traditional investments forced investors into other asset classes in search of returns.
Sparkling wine isn’t typically seen as an investment worth ‘laying down’ like you see with some Bordeaux reds that add value as they mature. However, the Laurent-Perrier house excels in assemblage, which is the combination of working with the three main Champagne varietals, Chardonnay, Pinot Noir and Meunier, assembling them to recreate the characteristic Laurent-Perrier style each year. These wines are then aged for long periods until they are ready to be released onto the market. Current inventories for Laurent-Perrier stand at €598.8 million (LPE Market Cap €619m).
The Company suffered in the pandemic, with closures and lockdowns in its various markets. Laurent-Perrier’s business is linked closely with on-trade rather than off-trade sales, and has been associated particularly with high-end gastronomy throughout its history. Therefore, the closing of on-trade establishments such as restaurants and hotels during lockdowns in each of its various markets had a profound impact on its top line and gross profits.
The overall global champagne market was down 16.0% in terms of volume shipped over the period from 1 April 2020 to 31 March 2021 compared to the previous year. Laurent-Perrier’s sales of champagne during this period totalled €184.7 million, down 20.1% at current exchange rates (excluding the currency effect, it stood at €185.9 million). The sharp -25.4% decrease in the volume of champagne sold by the Group, a consequence of the health measures adopted around the world (including as aforementioned the closure of hotel and restaurant activities and the severe limitation of air traffic worldwide), was limited in terms of revenue by a price/mix effect of +5.8%, driven by the strength of its brands and the quality of its premium champagnes.
However, Laurent-Perrier managed to improve on its operating margin during the period, despite a sharp decrease in its top line in the financial year ended 31 March 2021. Its reported operating margin for FY’21 was 22.4%, an improvement from the prior year of 17.8% in FY’20. The Company increased this margin even in comparison to pre-pandemic results, with the Company’s operating margin standing at 17.6% in FY’19 and 17.2% in FY’18.
In its most recent half-year results, the Group reported a strong increase due to the global economic recovery. The robust growth has been supported by the restocking of Laurent-Perrier’s customers' inventories around the world and the recovery in consumption.
As seen from the the financial table above, in Laurent-Perrier’s most recent half year to the 30th of September 2021, Group turnover increased by 29.6% compared to the prior year (1st April 2019 to 30 September 2019) and 80.5% from the year before (1 April 2020 to 30 September 2020). The Group’s operating profits also increased, with operating margins at 27.8% for the most recent half year period, up from 20.5% in the prior year and from 20.0% the year before.
As I discussed in the introduction, Laurent-Perrier has a wonderful heritage and family history that plays out in the shareholder ownership structure with the De Nonancourt family holding 61% of the business, which is likely to ensure the brand continues to uphold its premium value over time. Interestingly even despite the recent results, Laurent-Perrier only trades for 16x earnings forecast for 2022, and you get nearly 600m euros of ‘the good stuff’ tucked away in inventory on the balance sheet. With prices of premium assets rising due to inflation, there is probably a good chance that Laurent-Perrier’s inventory gets re-assessed at a better valuation.
At the time of writing, The Twenties Trader owned shares in Garmin, and did not own shares in IPG or Laurent-Perrier.
For the full list of Twenties Trader Portfolio holdings, view here.
If you enjoyed reading this article and want to find out about my favourite long term shares, be notified of my trades and be privy to in-depth international company research, become a member of the Twenties Trader here.