The MS Global Franchise Fund (Trades, Portfolio), which is part of Morgan Stanley (MS, Financial), recently disclosed its portfolio updates for the fourth quarter of 2019.
Based in New York, the fund is managed by a nine-person team that invests based on a bottom-up stock selection process. The team looks for companies that have strong franchises, high and sustainable return on invested capital, strong free cash flow, difficult-to-duplicate intangible assets, good financial strength and capable management.
Based on the above investing criteria, the firm added the most to its holdings in Thermo Fisher Scientific Inc. (TMO, Financial), Philip Morris International Inc. (PM, Financial), Automatic Data Processing Inc. (ADP, Financial) and Becton, Dickinson and Co. (BDX, Financial) during the quarter.
Thermo Fisher Scientific
The MS Global Franchise Fund (Trades, Portfolio)’s biggest buy was for 75,175 shares of Thermo Fisher Scientific, which increased the size of the holding by 48.41%. The trade had a 1.18% impact on the equity portfolio. Shares traded at an average price of $304.01 during the quarter.
Thermo Fischer is a medical diagnostics and research company headquartered in Waltham, Massachusetts. It provides scientific instruments, reagents and consumables, as well as software and services, to the fields of health care, life sciences, government, industry and academia.
On March 9, shares of Thermo Fischer traded around $293.60 apiece for a market cap of $116.83 billion and a price-earnings ratio of 31.97. According to the Peter Lynch chart, the stock is trading on the high end of its fair value.
GuruFocus had assigned the company a financial strength rating of 5 out of 10 and a profitability rating of 9 out of 10. The cash-debt ratio of 0.14 is low, but the Altman Z-score of 3.95 indicates financial stability. The company has consistently grown its revenue and net income in recent years and has an operating margin of 16.19%.
Philip Morris International
The fund added 259,867 shares, or 15.36%, to its investment in Philip Morris International, impacting the equity portfolio by 1.07%. During the quarter, shares traded at an average price of $82.55.
Philip Morris is perhaps the world’s most iconic cigarette and tobacco company. Based in New York, the Swiss-domiciled company owns famous brands such as Marlboro that are sold in 180 markets globally. The company is shifting focus and aims to transition its customers to smoke-free tobacco products.
On March 9, Philip Morris shares traded around $81.51 for a market cap of $128.98 billion and a price-earnings ratio of 17.7. The Peter Lynch chart indicates that the stock is trading at the high end of its fair value estimate.
Philip Morris has a GuruFocus financial strength rating of 4 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.22 is lower than the industry median, but the Altman Z-score of 4.11 indicates that the company is not in danger of bankruptcy. Revenue and net income have been fairly flat over the years, but the operating margin of 35.03% and return on capital of 149.13% are a testament to the profitability of the business model.
Automatic Data Processing
The fund added 128,064 shares, or 32.78%, to its investment in Automatic Data Processing, impacting the equity portfolio by 1.05%. During the quarter, shares traded at an average price of $165.82.
Automatic Data Processing is a provider of business outsourcing solutions based in Roseland, New Jersey. Its services include human resources, payroll, tax and benefits.
On March 9, shares of Automatic Data Processing traded around $153.22 for a market cap of $66.09 billion and a price-earnings ratio of 27.04. According to the Peter Lynch chart, the stock may be overvalued.
GuruFocus has assigned the company a financial strength rating of 5 out of 10 and a profitability rating of 9 out of 10. The Altman Z-score of 2 suggests that the company may have trouble paying its long-term debts, but the interest coverage of 24.86% and current ratio of 1.02 suggest that it is financially stable in the short term. The company has increased both net income and revenue over the past few years, and the return on capital of 320.9% is higher than 94.99% of competitors.
Becton, Dickinson
The fund added 45,768 shares, or 19.44%, to its investment in Becton, Dickinson and Co., impacting the equity portfolio by 0.60%. During the quarter, shares traded at an average price of $255.96.
Becton, Dickinson is a medical device company headquartered in Franklin Lakes, New Jersey. In addition to manufacturing and selling medical devices, instruments and reagents, the company also provides consulting and analytics services.
On March 9, shares of Becton, Dickinson traded around $229.99 for a market cap of $62.36 billion and a price-earnings ratio of 85.42. GuruFocus has assigned the company a financial strength rating of 4 out of 10 and a profitability rating of 9 out of 10.
With a cash-debt ratio of 0.03, interest coverage of 3.06% and a current ratio of 0.96, the company may have trouble meeting its short-term financial obligations. The Altman Z-Score of 2.03 may signal minor long-term financial weakness.
Becton, Dickinson’s revenue growth has been fairly steady, though net income took a significant tax-related hit in 2018. The operating margin of 10.64% and net margin of 5.25% are outperforming 61.85% of competitors.
Portfolio overview
As of the quarter’s end, the equity portfolio consisted of 30 stocks valued at a total of $2.07 billion. The top holdings were Microsoft Corp. (MSFT) with 8.51% of the equity portfolio, Philip Morris International with 8.01% and Reckitt Benckiser Group PLC (LSE:RB.) with 7.57%.
In terms of sector weightings, the fund is most invested in consumer defensive stocks (35.40%), followed by technology (21.44%) and health care (20.96%).
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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