In a low growth global environment, U.S. companies that focus on the domestic market have been outperforming their global counterparts. Damian Fernandes, Portfolio Manager, TD Asset Management, speaks with Kim Parlee about which companies represent growth opportunities and why.
It's gone from-- I'd say-- not large caps to these mega caps.
And what's interesting right now is we're seeing the same dynamic, I say, in the States happening is in Canada.
As Canadian companies are looking to the States for growth, well, American companies are looking for the States to growth too, right?
I think in the US, what you really have-- let's think about growth globally.
It's a bad neighborhood.
But the US is the best house in this bad neighborhood.
In developed markets, the US has grown on a nominal basis 4%.
And that is probably the top of developed market growth levels.
It used to be that emerging markets were our engine of growth.
But in the last few years, we've seen-- for a variety of reasons-- that a lot of the biggest emerging markets-- think about Brazil, Russia-- are actually in recession.
So when you think about the global landscape, one of the best areas where you're actually seeing top line revenue growth remains the US.
It's funny, though, because Brazil, Russia-- yes.
We know there's been a lot of turmoil going on there, too.
But China, still, on an absolute basis, has a higher growth rate-- does it not-- than the States.
So why aren't we seeing more US companies focus more in that area?
I think a big challenge for US companies is that the Chinese enterprise wants to focus on building their own domestic winners.
For example, let's think about US autos.
And they've want to expand the Chinese market.
But they've had to partner up with local players.
I think US companies are slowly realizing that to operate effectively in China and actually participate in that much higher growth levels, they have to give something up.
And we've had a few companies that do that.
And sometimes it actually works for the better of these companies.
I can think of, for example, more recently, McDonald's.
It took its Chinese operations and its operations in Hong Kong, and it actually found a local partner to operate them, where McDonald's will now just be a franchisee.
These operations were generating about $200 million in EBITDA.
So that's cash flow before taxes.
It sold them for about $3 billion.
McDonald's going to go take that cash and now return it back to shareholders.
It finds it more profitable and a better proposition for its shareholders to actually partner with local players who know the market.
It's getting a lot more competitive in the fastest growth area.
Let me ask you.
And I was doing some reading beforehand, looking at things called reshoring-- I guess people kind of bringing things back to the States.
But give me an example, or you've got a couple of examples here, of companies that are doing well in the US, growing their earnings domestically.
And the first one, I think, is JPMorgan Chase.
So what's happening with them?
Well, we talked about at the start that the US is actually one of the few places where you're seeing some level of growth, even albeit even slower.
But it is positive.
So financial services in the US-- JPMorgan is a money center bank.
It does everything from mortgages to providing loans to small businesses to capital market activity-- most of that business in the US.
But JPMorgan is actually participating in the domestic recovery in the US.
Before I came here, I was just looking at JPMorgan's loan book.
And loans at JPMorgan have grown 10% since the last quarter, versus last quarter a year ago.
That is phenomenal.
Is this mortgage?
Is this car?
It's small business loans.
And so JPMorgan's loan book is actually growing quite nicely.
In fact, the company's still trading at mid to low teen multiples.
And they've just got approval from CCAR.
So for those that don't know, for a bank to return capital in the US, they actually have to ask for approval.
So JPMorgan got approval to return $18 billion.
What does that mean?
That's 4 and 1/2% of its market cap.
It pays a close a 3% dividend.
As an investor, you know JPMorgan-- whatever happens over the next year-- over 7% of the company is going to come back to you in cash.
That's a very attractive proposition in this rate environment.
Especially in a low growth world, so to speak.
Lockheed Martin another one you think that is growing earnings domestically, which is interesting.
Because I've been watching the stock closely myself for the past while, and it's had quite the dip in the past, I think, few weeks.
I'm assuming with Lockheed, there's an election coming up.
What does that mean for the military spending cycle, all that good stuff?
So why is Lockheed interesting?
Look, I think we have two very, say, difficult candidates-- one polarizing for a lot of people, and one who is traditional, but comes with her own baggage.
So what's interesting, when you look at both platforms, is that regardless of who gets elected, they are focusing on infrastructure spending and focus on more increased government spending to try and improve growth.
The defense budget-- regardless of who gets elected-- is going to grow 18%, up to 20% 21%.
Lockheed Martin is one of the biggest suppliers for the US defense, the DOD.
So it automatically participates in that growth.
It's interesting, because it makes the F-35 jets, and those are coming into service pretty soon.
And it has an order for 3,100.
That's $200 billion of revenue that's already signed that is just going to come to the company.
We like the company, because over time, it's been a great-- what I call-- allocator of capital and shareholder returns.
I was looking this up the other day.
The last 10 years, Lockheed has returned $33 billion to shareholders in dividends and repurchases.
The company's $74 billion.
Basically, 45% percent of the company has come back to you.
Has come back to shareholders.
And now we have a growth platform, and how more of that revenue is coming.
Let me ask you to play devil's advocate to yourself on this one.
What's the risk with Lockheed Martin, I guess, in this one right now?
What's the risk?
The risk is that the defense budget gets cut.
And some of those F-35 planes don't get built the same way, or they have a hiccup in the delivery of those planes.
There are operational risks.
But in a low growth environment, the top line growth is already there if they execute.
They have a history of doing this.
Let me ask you too.
I've only got about 30 seconds here.
But in terms of currency and how you have to manage that.
Companies that have more US business have less currency risk at the same time.
So the higher the dollar goes, which-- if the Fed raises-- which most people think they will, eventually, one day, some day.
Cross our fingers.
Yeah, well, who knows.
But that's going to hurt any business outside of the States.
So there's a natural hedge for companies that are more domestically focused.
For example, companies like Home Depot have virtually no currency risk, because all their business is in the US.
A lot of the biggest US companies are multinationals, and they've had significant headwinds from translating over to US dollars because of FX risks.
That is, of course, Damian Fernandes, Portfolio Manager with TD Asset Management.