The MS Global Franchise Fund (Trades, Portfolio), which is part of investment bank Morgan Stanley (MS, Financial), released its second-quarter portfolio earlier this week.
Managed by a nine-person team, the New York-based fund invests in high-quality companies from around the world in order to achieve long-term capital appreciation. It looks for companies that have resilient business franchises and growth potential.
With these criteria in mind, the fund entered one new position during the quarter, reduced 13 holdings and added to 17 other investments. Its most notable trades for the quarter included establishing a holding in Roper Technologies Inc. (ROP, Financial) and boosting its positions in Procter & Gamble Co. (PG, Financial), Reckitt Benckiser Group PLC (LSE:RB., Financial), Becton, Dickinson and Co. (BDX, Financial) and Philip Morris International Inc. (PM, Financial).
Roper Technologies
The firm invested in 61,334 shares of Roper Technologies, allocating 0.97% of the equity portfolio to the holding. The stock traded for an average price of $357.06 per share during the quarter.
The Sarasota, Florida-based tech company, which manufactures engineered products and solutions that include information networks, medical products and software, has a $44.08 billion market cap; its shares were trading around $420.70 on Friday with a price-earnings ratio of 27.56, a price-book ratio of 4.46 and a price-sales ratio of 8.2.
The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 1 out of 10 also supports this assessment since the share price and price-sales ratio are near 10-year highs.
GuruFocus rated Roper's financial strength 5 out of 10. In addition to adequate interest coverage, the robust Altman Z-Score of 4.23 indicates it is in good standing even though assets are building up at a faster rate than revenue is growing.
The company's profitability fared even better, scoring a 9 out of 10 rating on the back of strong margins and returns that outperform a majority of competitors as well as a high Piotroski F-Score of 7, which implies operations are healthy. Despite recording a slowdown in revenue per share growth over the past 12 months, Roper also has a predictability rank of five out of five stars. According to GuruFocus, companies with this rank return an average of 12.1% annually over a 10-year period.
Of the gurus invested in Roper Technologies, Chuck Akre (Trades, Portfolio)'s firm has the largest stake with 1.66% of outstanding shares. Other top guru shareholders include Ron Baron (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Frank Sands (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies and Diamond Hill Capital (Trades, Portfolio).
Procter & Gamble
With an impact of 2.33% on the equity portfolio, MS Global boosted its Procter & Gamble position by 102.51%, buying 476,233 shares. During the quarter, shares traded for an average price of $116.42 each.
The fund now holds 940,804 shares total, representing 4.6% of the total assets managed. GuruFocus estimates it has gained 15.73% on the investment since establishing it in the first quarter of the year.
The consumer goods manufacturer headquartered in Cincinnati, which owns legacy brands like Charmin, Gillette and Tide, has a market cap of $341.53 billion; its shares were trading around $137.18 on Friday with a price-earnings ratio of 27.67, a price-book ratio of 7.46 and a price-sales ratio of 5.08.
According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 1 out of 10 also supports this assessment since the share price and price-sales ratio are near 10-year highs.
Procter & Gamble's financial strength was rated 6 out of 10 by GuruFocus. Although the company has issued approximately $2.8 billion in new long-term debt over the past three years, it is at a manageable level due to having adequate interest coverage. It also has a high Altman Z-Score of 4.94 and the ROIC surpasses the WACC, suggesting good returns on invested funds.
The company's profitability scored an 8 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of industry peers and a high Piotroski F-Score of 7. Despite recording a slowdown in revenue growth, Procter & Gamble also has a one-star predictability rank. GuruFocus says companies with this rank typically return 1.1% on average annually.
With 0.15% of outstanding shares, Pioneer has the largest stake in Procter & Gamble. Other top guru shareholders include Yacktman Asset Management (Trades, Portfolio), Diamond Hill, Simons' firm, Ken Fisher (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Warren Buffett (Trades, Portfolio) and Mairs and Power (Trades, Portfolio).
Reckitt Benckiser Group
Impacting the equity portfolio by 1.10%, the fund increased its stake in Reckitt Benckiser by 13.47%, buying 293,620 shares. The stock traded for an average per-share price of 67.68 pounds ($89.89) during the quarter.
The firm now holds 2.47 million shares. GuruFocus data shows it has gained approximately 21.88% on the investment since the first quarter of 2009.
The British consumer goods company has a market cap of 51.49 billion pounds; its shares closed at 72.38 pounds on Thursday with a price-book ratio of 5.16 and a price-sales ratio of 3.8.
Based on the median price-sales chart, the stock appears to be overvalued. The GuruFocus valuation rank of 3 out of 10 also supports this assessment since the share price and price-sales ratio are approaching multiyear highs.
GuruFocus rated Reckitt Benckiser's financial strength 5 out of 10. Although the company has issued approximately 7.6 billion pounds in new long-term debt over the past three years, it is at a manageable level due to adequate interest coverage. The Altman Z-Score of 2.5, however, indicates it is under some pressure since assets are building up faster than revenue is growing. The ROIC also greatly exceeds the WACC, suggesting good returns on its investments.
The company's profitability scored an 8 out of 10 rating on the back of an expanding operating margin. The returns, however, are negative and underperform a majority of competitors. Reckitt Benckiser also has a moderate Piotroski F-Score of 5, which implies business conditions are stable, and a two-star predictability rank that is supported by consistent earnings and revenue growth. GuruFocus data shows companies with this rank return, on average, 6% annually.
MS Global is the company's largest guru shareholder with 0.35% of outstanding shares. David Herro (Trades, Portfolio) also owns the stock.
Becton, Dickinson
The fund upped its Becton, Dickinson holding by 30.79%, buying 97,448 shares. The trade had an impact of 0.95% on the equity portfolio. During the quarter, the stock traded for an average price of $246.67 per share.
Accounting for 4.05% of the equity portfolio, the firm holds 413,989 shares total. According to GuruFocus, it has lost around 4.71% on the investment since the third quarter of 2018.
Commonly known as BD, the Franklin Lakes, New Jersey-based company, which manufactures medical devices, instrument systems and reagents, has a market cap of $68.28 billion; its shares were trading around $233.81 on Friday with a price-earnings ratio of 84.71, a price-book ratio of 2.84 and a price-sales ratio of 3.86.
The Peter Lynch chart and the GuruFocus valuation rank of 3 out of 10 both suggest the stock is overvalued, especially since the price-book ratio is near a 10-year high.
BD's financial strength was rated 4 out of 10 by GuruFocus. In addition to poor interest coverage, the company's Altman Z-Score of 2.16 indicates it is under pressure as a result of assets building up at a faster rate than revenue is growing. The WACC also exceeds the ROIC, indicating poor returns on its investments.
Despite having a declining operating margin, the company's profitability scored a 9 out of 10 rating. BD has strong returns that outperform over half of its industry peers, as well as a high Piotroski F-Score of 7. As a result of revenue per share declining over the past year, the three-star predictability rank is on watch. GuruFocus says companies with this rank return, on average, 8.2% annually.
Of the gurus invested in BD, Al Gore (Trades, Portfolio)'s Generation Investment Management has the largest stake with 0.89% of outstanding shares. Pioneer, the T. Rowe Price Equity Income Fund, Jeremy Grantham (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Robert Olstein (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio) also have large positions in the stock.
Philip Morris International
With an impact of 0.95% on the equity portfolio, MS Global boosted its Philip Morris International stake by 14.04%, buying 329,837 shares. During the quarter, shares traded for an average price of $72.91 each.
The fund now holds 2.7 million shares total, representing _% of the total assets managed. GuruFocus estimates it has lost 2.29% on the investment.
The tobacco company, which is headquartered in New York, has a $123.26 billion market cap; its shares were trading around $79.15 on Friday with a price-earnings ratio of 16.92 and a price-sales ratio of 4.24.
According to the Peter Lynch chart, the stock is overvalued. The GuruFocus valuation rank of 4 out of 10 also supports this assessment since the price-sales ratio is near a 10-year high.
GuruFocus rated Philip Morris' financial strength 4 out of 10 on the back of adequate interest coverage and a robust Altman Z-Score of 4.34. The ROIC also exceeds the WACC by a wide margin, suggesting good profitability on its investments.
The company's profitability fared even better, scoring an 8 out of 10 rating. Although the operating margin is in decline, Philip Morris has strong returns that outperform a majority of competitors. It also has a moderate Piotroski F-Score of 6, but slowing revenue per share growth has led to the one-star predictability rank being on watch.
With a 0.83% stake, First Eagle Investment (Trades, Portfolio) is the company's largest guru shareholder. Tom Russo (Trades, Portfolio), John Rogers (Trades, Portfolio), the T. Rowe Price Equity Income Fund, Grantham, Diamond Hill and Pioneer also have large positions in Philip Morris.
Additional trades and portfolio performance
Some of the positions that MS Global trimmed during the quarter included Nike Inc. (NKE, Financial), Heineken NV (XAMS:HEIA, Financial), The Coca-Cola Co. (KO, Financial), Experian PLC (LSE:EXPN, Financial) and SAP SE (XTER:SAP).
The fund's $2.45 billion equity portfolio, which consists of 32 stocks, is largely invested in the consumer defensive, technology and health care sectors.
GuruFocus data shows the Global Franchise Fund posted a return of 29.6% in 2019, slightly outperforming the MSCI World Net Index's 27.67% return.
Disclosure: No positions.
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