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Stocks
Stock picks for the long haul: BHP and Coca Cola Amatil
Jill Fraser - November 21, 2007
Fund manager stock pick: BHP and Coca Cola Amatil
Current share price: BHP Billiton (BHP) $41.31; Coca Cola Amatil(CCL) $10.12
Fund manager: Paul Xiradis, CEO Ausbil Dexia
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Paul Xiradis, Ausbil Dexia | In this section, CompareShares picks fund managers' brains for the stocks to watch in the year ahead. Jill Fraser reports
If the much touted $400 billion BHP Billiton/Rio Tinto mega-merger occurs, it will create a mining goliath that would control almost 40 percent of the world's iron ore production. The union is something that Ausbil Dexia’s Paul Xiradis predicts will take place within months despite the threat of China stalling procedures, "because it’s not in the interest of either group to prolong it longer than that".
But regardless of whether the merger transpires or not (and for the record Xiradis believes "common sense will prevail" and it’s a matter of "when" not "if") Xiradis has his money on the BHP’s shares continuing to rise from its current price of $41.31.
If the merger does eventuate he anticipates that the rise will be sizeable. "We’ve seen a substantial transformation of the company in the last 15 to 20 years," says Xiradis.
"The most significant reinvigoration was after it changed its board structure and bought Billiton (2001). It went from being the big sleepy Australian giant, which wasn’t managed or optimised as far as operations or earnings were concerned, to a company that’s now very focused on delivering the highest possible shareholders’ return on a sustainable basis."
Xiradis, who co-founded the boutique Ausbil Dexia in 1997 at a time when the investment market was dominated by large life insurance companies and banks, places great emphasis on "blending our top-down conclusions with our bottom-up stock selection".
"We’re a bit different to most in that we maintain that before you can construct an equities portfolio you need a good understanding of the economic and market environment and the changes that are likely to occur over the coming 12-month period.
"We’re also stock pickers but we take into account macro considerations such as how interest rates, currencies and underlying economic growth may change because we believe that all those influences impact on a company’s operating environments," he says.
From a top down (macro) perspective, Xiradis believes global growth will remain strong for some time because it is coming from the emerging BRIC (Brazil, Russia, India, China) economies. He is therefore confident about BHP’s future due to the emerging economies’ appetite for raw materials and commodities.
Xiradis’ second stock pick is Coca Cola Amatil, currently trading at $10.12 and tipped by Merrill Lynch to reach $11.50 within 12 months.
"We like CCL because we are of the view that the weakness in the US dollar will continue for some time and conversely the Australian dollar will strengthen. In a rising exchange rate environment not many Australian companies benefit but CCL is an exception," says Xiradis.
The reason for this is import pricing. Materials such as sugar used to produce the soft drink, aluminium cans and glass bottles and syrup are sourced outside Australia. Therefore as the Aussie dollar strengthens CCL’s cost of importing reduces.
Coca-Cola Amatil is the fifth largest bottler within the Coca-Cola system. CCL manufactures, packages, distributes, markets and promotes the trade marked products of The Coca-Cola Company in the Asia-Pacific region. It also manufactures and markets a diverse range of its own beverage products.
Xiradis rates CCL highly from both a top down and bottom up perspective.
Merrill Lynch sees a unique opportunity for CCL to re-rate over the next 12 months. In FY08E it expects the company could trade on a 20% premium to the market "based on what we believe to be a sustained period of strong earnings growth and high returns - never delivered by the company before".
A recent report prepared by Merrill Lynch stated: Our research earnings and returns profile for CCL is underpinned by growth in its key business – Australia. We expect 12-15% EBIT growth in Australia can be sustained based on - volume growth, COGS relief & currency benefits. Combined with improved performances in NZ, Indonesia and the confirmed sale of South Korea, we see this as a unique investment opportunity.
Risks for both BHP and CCL are linked to global growth. If global growth slows dramatically and impacts the emerging economies, commodity prices may fall, which will impact on BHP. But in Xiradis’ view this will be contained.
If the reverse occurs and the Aussie dollar weakens substantially it could be a negative for CCL.
More articles from this edition of CompareShares:
Resident Trader: Lessons from a week rather forgotten
Stocks: Stock picks for the long haul: BHP and Coca Cola Amatil
Superannuation: Putting SMSF eggs in one basket
Commodities: Why oil refiners are getting hammered
Stocks: Stock to watch - Wesfarmers
Markets: Markets over-reacting to US slowdown
Smart Investing: There is such a thing as a cheap lunch
Expert Panel (CFDs): Pairs trading scenarios
Economics: BHP talks Rio value, steelmakers howl
Whatever your views, you can discuss this article - or any of Jill's articles - on our message board Your 2 Cents.
Jill Fraser has 25 years' experience in the media as a radio producer on 2UE and journalist for News Ltd, Australian Consolidated Press and Key Media.
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