Article / 12 February 2016 at 15:22 GMT

Alpha Picks: Adding Moody's to our list of stock picks

Head of Equity Strategy / Saxo Bank
  • Adding Moody's (MCO:xnys) to our Alpha Picks list
  • At close to 52-week lows, valuation is looking very attractive at EV/EBITDA 10x
  • Moody's has high-margin business with low capex and it is growing faster than rivals
  • We also highlight Novo Nordisk, Edenred, Michael Kors and Fuji Heavy Industries

 Attractive valuation has led to Moody's inclusion on Saxo Bank's Alpha Picks list. 
Image: Moody's 2014 annual report

By Peter Garnry

We have added shares in US rating agency Moody's (MCO:xnys) to our Alpha Picks list as a decline in the price to near 52-week lows has made the valuation attractive.

Moody's stock is now trading at an enterprise value of 10X EBITDA. The company has a high-margin busiess with very low capex levels, free cashflow of about $1.1 billion and market cap of about $15.5 billion.

Moody's business is also growing faster than its competitors.

Key risks to investing in Moody's shares are the stock price's high sensitivity to bond issuance and a stronger US dollar.

Four other highlights on our list 

We also want to highlight the following four stocks, though they are not new additions to our list.

Novo Nordisk (NOVOb:xcse)
  • Sharp selloff after fourth-quarter earnings and 2016 guidance (taking long-term operating profit growth down to 10% from 15%) 
  • The Danish company is industry leader in global diabetes care, with the best drugs and new winning drugs on the way 
  • Attractive valuation (EV/EBITDA 15x) against above-median revenue growth, strong margins and predictable cashflows 
  • Key risks: weaker USD, bad newsflow on US drug pricing, global risk-on sentiments accelerates 

Edenred (EDEN:xpar)
  • The corporate services provider's stock is trading close to 52-week lows, driven lower by Latin American and Caribbean exposure (46% of revenue)
  • World's largest operator of prepaid corporate services (employee benefits, expense management etc.) 
  • Very predictable business with strong free cashflows – high recurring revenue (sticky business model) 
  • Key risks: further slowdown in Brazil and Latin America, currency risk to LatAm, changing tax regimes for vouchers 

Michael Kors (KORS:xnys)
  • Shares in the designer handbags group are up 26% after fourth-quarter earnings as sales and outlook beat estimates, driven by new product mix and mitigation from e-commerce sales  
  • Very attractive valuation (EV/EBITDA 6x) against 10% free cashflow yield and cashflow to assets of +60% 
  • 2016 outlook will drive repricing of valuation multiples; international expansion will also drive growth 
  • Key risks: slowdown in consumer spending, lower US mall traffic, slowdown in international expansion 

Fuji Heavy Industries (7270:xtks)
  • Top-line growth at the Japanese conglomerate is close to 10% year-on-year, with margins expanding on the back of a weaker yen (though not in recent weeks) 
  • Extremely low valuation (EV/EBITDA 3x) which is out of touch because the Bank of Japan will not let the JPY strengthen further 
  • Strong fundamentals in the global auto sector; US auto sales have surprised positively (Fuji gets 60% of revenue from North America) 
  • Key risks: stronger JPY, slower economic growth hurting auto sales

— Edited by John Acher

Peter Garnry is head of equity strategy at Saxo Bank

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Updated Alpha Picks

SierraPt. SierraPt.
For those who's not following closely, can you please explain the difference between Alpha picks and your model portfolio? I.e. you included Moody's in Alpha Picks, but there have been no trade idea on it - does this mean you believe this is not the time to buy it? Thanks!
Peter Garnry Peter Garnry
It's a very good question. Our Alpha Picks model is very much a structured portfolio framework that anyone can follow. It can also be viewed as an idea list. The names mentioned in this update are those I find interesting at the moment. They might go into our portfolio of #SaxoStrats ideas or not. It sort of depends on market action because the #SaxoStrats concept is much more on trading than long-term investing. Alpha Picks is about longer term investing. But essentially all Alpha Picks are candidates for our #SaxoStrats equity ideas - but the timing needs to be right trading wise... hope it makes sense


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