Auto Parts Retailers Consolidate Fragmented Industry to Achieve Scale and Bargaining Power: Two Portfolio Managers Share Their Picks and Discuss This and Other Secular Global Growth Trends

Wall Street Transcript

67 WALL STREET, New York - September 5, 2013 - The Wall Street Transcript has just published its Multicap Growth Investing Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investing in Financial Services - All-Cap Growth Investing - Disciplined Growth Approach - Global Economy - Top-Down and Bottom-Up Investing - High-Quality Growth

Companies include: Liberty Global Inc. (LBTYA), AutoZone Inc. (AZO), O'Reilly Automotive Inc. (ORLY), Green Mountain Coffee Roasters (GMCR), The Coca-Cola Company (KO), Starbucks Corp. (SBUX), Nike Inc. (NKE), UBS AG (UBS) and many more.

In the following excerpt from the Multicap Growth Investing Report, two expert money managers discuss their portfolio-construction methodology and their investment philosophy:

TWST: What are three examples of stock holdings that are representative of your approach and what attracted you to each of those names?

Mr. Laycob: I'd say one of the stocks that we've owned for quite some time is Liberty Global (LBTYA). It's a European cable company in Germany, the Netherlands, and recently made an acquisition in the U.K. of another company that we owned, Virgin Media. We like this company because the cable business in Europe is further back in the development of their marketplace relative to the U.S., and the cable companies have a significant advantage on speed and the broadband offering to consumers.

And they've been bundling triple-play play offering video, voice and data, while there're still plenty of room for them to take a lot of market share. In Europe as well, they have good pricing power, and Europeans continue to watch more and more television and have been willing to pay for advanced features, like HD and DVR boxes. So this has been a really good long-term compounding story for us. Liberty Global buys back a significant amount of stock every year and can grow free cash flow per share at mid-teens growth rate. So that's been a great stock for us.

Mr. Malhotra: And the one thing I would point out on Liberty is since 2007, they've bought back almost 30% of their shares outstanding, and so this is consistent with our theme of companies that generate cash and redistribute that cash.

Another example of a compounder is AutoZone (AZO). AutoZone and O'Reilly (ORLY) in the U.S. have a relatively small percentage of the total automotive retail business, and that market is highly fragmented with a lot of mom-and-pops that operate in different markets. And AutoZone and O'Reilly are continuing to consolidate this market as they use their scale and bargaining power. So there is a significant amount of runway for growth that we see over the next five to 10 years. Since 1998, AutoZone has shrunk its share count by 75% simply by reinvesting all of its free cash flow back into buying back stock. This is another example of a company that has wide moats around the business.

There really are only two major branded retail auto parts distributors in the United States. There is a significant amount of runway just from consolidating the market and driving and continuing to take market share. Returns on capital for the company are over 20% on an unlevered basis; that's well in excess of their cost of capital they dedicate most of their free cash flow to buying back stock. And so, this is a company that should continue to deliver for us low-to-mid teens compound free cash flow growth over the next several years.

A third example of the kinds of stocks that we own in the portfolio, and this is what I'll consider that one-third of the portfolio that's sort of an opportunistic or contrarian purchase, is...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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