William von Mueffling has long been regarded as one of the world’s leading fund managers, and since his Cantillon Capital Management currently holds only 33 stocks, it’s worth keeping a close eye on what the fund has been buying and selling.
Digging into the latest 13F filing at the SEC shows three significant purchases in very contrasting companies. Let’s look at all three — semiconductor materials company Entegris (NASDAQ:ENTG), marine boat and engine company Brunswick (NYSE:BC), and life sciences and diagnostics technology company Agilent Technologies (NYSE:A).
Three vastly different stocks
Not only do the three operate in vastly different end markets, but they also offer significantly different investment propositions. Brunswick is the value option, refocusing on its core marine business following the sale of its commercial fitness equipment business, called Life Fitness, to a private equity firm in June.
Agilent has solid defensive growth characteristics and might suit risk-averse investors looking for a combination of mid-single-digit growth and some security in an economic downturn. Meanwhile, Entegris operates in a cyclical industry, semiconductors, whereby revenue and earnings can fluctuate significantly from period to period.
Agilent offers defensive growth
The life sciences and diagnostics company is the easiest investment to understand, as Cantillon is also holding stock in relatively defensive names like Ecolab, animal health company Zoetis, and Agilent’s direct competitor Thermo Fisher.
Agilent belongs in a stable of blue-chip life sciences and diagnostics companies that also includes Danaher (NYSE:DHR), Waters Corp., PerkinElmer, and Thermo Fisher, which offer relatively safe mid-single-digit annual growth prospects. As such, investors have warmed to the sector in the past year, as it offers security in an environment of slowing global growth — particularly as it doesn’t appear to be a battleground area in the trade conflict with China.
Agilent is currently toward the low end of its peer group valuations, and Cantillon may have bought it on a relative valuation basis.
That said, Danaher is arguably the most attractive company in the sector, not least because of its transformative deal to buy General Electric‘s biopharma business — a deal on a very attractive valuation, and one that should be complimentary to Danaher’s own life sciences solutions.
Brunswick is the value option
The sale of the Life Fitness business in the summer has created a marine-focused company with three related revenue streams — boats, marine engines, and parts and accessories, each contributing roughly a third of total revenue. It’s a marketplace that has traditionally been seen as tied to the housing market, and it’s no coincidence that U.S. new boat sales last peaked in 2006 — just before the housing market slump set in — but there has been a slow and gradual recovery since then.
Moreover, management argues that its revenue is now a lot less cyclically exposed than in 2017, with some 35% coming from engine parts and accessories and around 60% coming from outboard engines and boats, compared with around 15% and 25% in 2007. That’s good news for long-term investors.
Management expects to generate $4.15 in EPS in 2019 and $5-$5.50 in 2020, in line with analyst forecasts, with around $260 million in free cash flow in 2019 and $300 million to $350 million in 2020. Such figures put the company on very attractive valuations, but the question for long-term investors is whether the recreational boat market in the U.S. is set for the kind of long-term growth Brunswick needs to sell its outboard engines and boats. If it is, then Cantillon’s purchase looks like a good stock purchase.
Entegris offers cyclical upside
A developer and manufacturer of materials for use in semiconductor manufacturing, Entegris is always going to be tied to the cyclical nature of the industry. Long-term growth trends such as the Internet of Things (IoT) and the ever-increasing need for more powerful and efficient semiconductors is seen as benefiting Entegris’ solutions, which aid advanced manufacturing processes.
Cantillon’s purchase clearly represents the expansion of an investment theme, as it also holds semiconductor manufacturers Analog Devices, Taiwan Semiconductor — a major Entegris customer representing 10% of 2018 sales — and Broadcom. Entegris’ other major customer is Samsung Electronics, representing 11% of 2018 sales. Together, these stocks make up around 10% of Cantillon’s holdings.
It’s an interesting idea because the semiconductor industry has been hit in 2019, partly as a consequence of declining smartphone sales and the fallout of the trade war on manufacturing in Asia. Entegris’ revenue declined 1% in its recent third quarter. However, there are some positive green shoots emerging. For example, 3M CEO Mike Roman spoke of “early indications that [the semiconductor industry] is looking like it might start to improve” and added that there have been “some consumer electronics, [original equipment manufacturers], and brands that have talked about increasing sales.”
If that’s borne out in a pickup in semiconductor capital spending, then von Mueffling’s investment in Entegris will prove to be a wise investment.
