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The Top 5 Trades of the MS Global Franchise Fund

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GuruFocus.com
·9 min read
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- By Sydnee Gatewood

The MS Global Franchise Fund (Trades, Portfolio), which is part of investment bank Morgan Stanley (NYSE:MS), disclosed its third-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.

Sticking to these criteria, the fund entered one new position during the quarter and added to or trimmed a slew of existing holdings. Its most notable trades for the quarter included a new investment in Intercontinental Exchange Inc. (NYSE:ICE), boosts to the Baxter International Inc. (NYSE:BAX), Reckitt Benckiser Group PLC (LSE:RB.) and Automatic Data Processing Inc. (NASDAQ:ADP) stakes as well as a reduction of the Zoetis Inc. (NYSE:ZTS) holding.

Intercontinental Exchange

The fund invested in 514,482 shares of Intercontinental Exchange, allocating 1.87% of the equity portfolio to the holding. The stock traded for an average price of $98.51 per share during the quarter.

The Atlanta-based company, which operates global exchanges, clearing houses and provides mortgage technology, data and listing services, has a $59.22 billion market cap; its shares were trading around $104.99 on Tuesday with a price-earnings ratio of 28.92, a price-book ratio of 3.1 and a price-sales ratio of 7.57.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 3 out of 10 aligns with this assessment.

The Top 5 Trades of the MS Global Franchise Fund
The Top 5 Trades of the MS Global Franchise Fund

GuruFocus rated Intercontinental Exchange's financial strength 3 out of 10. Although the company has issued approximately $11.2 billion in new long-term debt, it is still at a manageable level due to adequate interest coverage. The Altman Z-Score of 0.57, however, warns the company could be at risk of bankruptcy. The return on invested capital is also eclipsed by the weighted average cost of capital, indicating poor value creation.

The company's profitability fared better, scoring a 7 out of 10 rating on the back of an expanding operating margin, strong returns that outperform over half of its competitors and a moderate Piotroski F-Score of 5, which indicates business conditions are stable. Spurred by consistent earnings and revenue growth, Intercontinental also has a predictability rank of 3.5 out of five stars. According to GuruFocus, companies with this rank return an average of 9.3% annually over a 10-year period.

Of the gurus invested in Intercontinental Exchange, Pioneer Investments (Trades, Portfolio) has the largest stake with 0.82% of outstanding shares. Other top guru shareholders include Ruane Cunniff (Trades, Portfolio), Jim Simons (Trades, Portfolio)' Renaissance Technologies, Frank Sands (Trades, Portfolio), Murray Stahl (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), John Rogers (Trades, Portfolio), George Soros (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Caxton Associates (Trades, Portfolio).

Baxter International

With an impact of 0.96% on the equity portfolio, the Franchise Fund boosted its stake in Baxter International by 27.83%, buying 328,299 shares. Shares traded for an average price of $84.14 each during the quarter.

The fund now holds 1.5 million shares, which represent 4.4% of the equity portfolio and is its eighth-largest holding. GuruFocus estimates it has lost 0.64% on the investment since the second quarter of 2018.

The Top 5 Trades of the MS Global Franchise Fund
The Top 5 Trades of the MS Global Franchise Fund

The health care company headquartered in Deerfield, Illinois, which primarily focuses on products to treat hemophilia, kidney disease, immune disorders and other chronic and acute medical conditions, has a market cap of $39.30 billion; its shares were trading around $76.33 on Tuesday with a price-earnings ratio of 43.41, a price-book ratio of 4.58 and a price-sales ratio of 3.44.

According to the Peter Lynch chart, the stock is overvalued.

The Top 5 Trades of the MS Global Franchise Fund
The Top 5 Trades of the MS Global Franchise Fund

Baxter International's financial strength was rated 5 out of 10 by GuruFocus, driven by adequate interest coverage and a high Altman Z-Score of 4.24. The ROIC also surpasses the WACC, indicating good value creation.

The company's profitability scored a 7 out of 10 rating on the back of an expanding operating margin, strong returns that outperform over half of its industry peers and a moderate Piotroski F-Score of 5. Baxter's one-star predictability rank, however, is on watch. GuruFocus says companies with this rank return, on average, 1.1% annually.

With a 2.32% stake, Al Gore (Trades, Portfolio) is the company's largest guru shareholder. The Vanguard Health Care Fund (Trades, Portfolio), Pioneer, Mairs and Power (Trades, Portfolio), the Eaton Vance Worldwide Health Sciences Fund (Trades, Portfolio), Larry Robbins (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Simons' firm, First Eagle, Robert Olstein (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and several other gurus also have positions in the stock.

Reckitt Benckiser

Impacting the equity portfolio by 0.53%, the fund increased its Reckitt Benckiser stake by 6.04%, buying 149,384 shares. During the quarter, the stock traded for an average per-share price of 75.75 pounds ($101.47).

MS now holds 2.6 million shares, accounting for 9.27% of the equity portfolio. GuruFocus data shows it has gained approximately 10.31% on the investment since the first quarter of 2009. Reckitt Benckiser is now the fund's largest holding.

The Top 5 Trades of the MS Global Franchise Fund
The Top 5 Trades of the MS Global Franchise Fund

The British consumer goods company has a market cap of 46.86 billion pounds; its shares closed at 65.84 pounds on Monday with a price-book ratio of 4.7 and a price-sales ratio of 3.47.

Based on the median price-sales chart, the stock appears to be overvalued. The GuruFocus valuation rank of 4 out of 10 also supports this assessment.

The Top 5 Trades of the MS Global Franchise Fund
The Top 5 Trades of the MS Global Franchise Fund

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 2.31, 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 value creation.

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 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.

The Global Franchise Fund holds 0.37% of Reckitt Benckiser's outstanding shares.

Automatic Data Processing

The fund expanded its Automatic Data Processing position by 16.76%, buying 100,963 shares. The transaction had an impact of 0.51% on the equity portfolio. The stock traded for an average price of $140.27 per share during the quarter.

The Global Franchise Fund now holds 703,375 shares total, which make up 3.56% of the equity portfolio. GuruFocus data shows it has gained 32.06% on the investment since the third quarter of 2015.

The Top 5 Trades of the MS Global Franchise Fund
The Top 5 Trades of the MS Global Franchise Fund

Commonly known as ADP, the Roseland, New Jersey-based company, which provides human resources management software, has a $74.39 billion market cap; its shares were trading around on $174.84 on Tuesday with a price-earnings ratio of 30.35, a price-book ratio of 12.92 and a price-sales ratio of 5.17.

The Peter Lynch chart suggests the stock is overvalued. The GuruFocus valuation rank of 2 out of 10 also leans toward overvaluation since the share price and price-sales ratio are both near 10-year highs.

The Top 5 Trades of the MS Global Franchise Fund
The Top 5 Trades of the MS Global Franchise Fund

ADP's financial strength was rated 6 out of 10 by GuruFocus on the back of comfortable interest coverage. The Altman Z-Score of 2.51, however, indicates the company is under some pressure since revenue per share growth has slowed over the past year.

The company's profitability scored a 7 out of 10 on the back of an expanding operating margin, strong returns that outperform a majority of industry peers and a high Piotroski F-Score of 7, which suggests business conditions are healthy. ADP also has a 2.5-star predictability rank. GuruFocus data shows companies with this rank return an average of 7.3% annually.

Simons' firm is ADP's largest guru shareholder with a 0.27% stake. Pioneer, Bill Nygren (Trades, Portfolio), Greenblatt, Olstein, Jeff Auxier (Trades, Portfolio), Mairs and Power (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) also own the stock.

Zoetis

The fund curbed its Zoetis holding by 26.31%, selling 94,012 shares. The trade had an impact of -0.53% on the equity portfolio. During the quarter, shares traded for an average price of $153.48 each.

MS now holds 263,262 shares total, which represent 1.58% of the equity portfolio. GuruFocus data shows the fund has gained 113.65% on the investment since the first quarter of 2017.

The Top 5 Trades of the MS Global Franchise Fund
The Top 5 Trades of the MS Global Franchise Fund

Headquartered in New Jersey, the company, which produces medicine and vaccinations for pets and livestock, has a market cap of $75.88 billion; its shares were trading around $160.91 on Tuesday with a price-earnings ratio of 46.31, a price-book ratio of 21.22 and a price-sales ratio of 11.76.

According to the Peter Lynch chart, the stock appears to be overvalued.

The Top 5 Trades of the MS Global Franchise Fund
The Top 5 Trades of the MS Global Franchise Fund

Despite having sufficient interest coverage and a robust Altman Z-Score of 6.48, Zoetis' financial strength was rated 5 out of 10 by GuruFocus. While the ROIC significantly surpasses the WACC, indicating good value creation, the company's assets are building up faster than revenue is growing, suggesting it is becoming less efficient.

The company's profitability scored an 8 out of 10 rating, driven by operating margin expansion, strong returns that outperform a majority of competitors and a high Piotroski F-Score of 7. Boosted by consistent earnings and revenue growth, Zoetis also has a 2.5-star predictability rank.

Sands is Zoetis' largest guru shareholder with a 1.1% stake. Other top guru investors include Pioneer, Simons' firm, Eaton Vance, Gabelli, Greenblatt, Jones, Mairs and Power (Trades, Portfolio), First Pacific Advisors (Trades, Portfolio), Ron Baron (Trades, Portfolio), Fisher, Dodge & Cox and Caxton Associates (Trades, Portfolio).

Additional trades and portfolio performance

During the quarter, MS Global also added to its holdings of Philip Morris International Inc. (NYSE:PM), LVMH Moet Hennessy Louis Vuitton SE (XPAR:MC), Visa Inc. (NYSE:V) and Procter & Gamble Co. (NYSE:PG), among others. It also trimmed a number of positions, including Accenture PLC (NYSE:ACN) and FactSet Research Systems Inc. (NYSE:FDS).

The fund's $2.76 billion equity portfolio, which consists of 33 stocks, is largely invested in the consumer defensive, health care and technology sectors.

The Top 5 Trades of the MS Global Franchise Fund
The Top 5 Trades of the MS Global Franchise Fund

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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This article first appeared on GuruFocus.