Hiding in plain sight – Sometimes value can be staring investors in the face
It may be a popular pastime among many investors but, here on the value perspective, ‘hunt the bid’ is not something that remotely interests us. Not that that ever seems to deter the various brokers who visit us proffering lists of companies that, for whatever reason, they think look or feel or smell like they are due for a takeover.
We of course prefer to focus our efforts on identifying financially strong yet cheaply valued businesses – although we would never pretend to have a monopoly on that. Clearly there are other people to whom such qualities also appeal, which means that, over time, companies we hold in our portfolios tend to see their fair share of bid action.
What is extraordinary about Pfizer’s current takeover bid for AstraZeneca is the US pharmaceutical giant’s target is not some esoteric company that nobody has ever heard of. This is the UK’s second largest pharmaceutical business and very much within the category of stocks investors like to describe as ‘mega-cap’.
we will make no comment on the adequacy or otherwise of Pfizer’s present – and, at the time of writing, still informal – offer of £63bn but what we would observe is that this values Astra drastically above where the share price was only a couple of years ago. For a long time, the company was trading below £30 a share but the Pfizer bid puts it at £50 a share.
That is an enormous difference in the value recognised by one business in another. Clearly some of that value can only come as a result of a bid because of the various synergies that can be found between two companies, the available tax advantages and so forth. But a lot of that value simply stems from Pfizer taking a very different view to the wider market on Astra’s potential as a business.
Another aspect of the bid worth highlighting at this point is AstraZeneca is actually quite a low-risk company – or at least it is in the eyes of The Value Perspective. Other people may perceive significant levels of business or operational risk but the reality is that a very large proportion of what Astra does is stable – one might almost say dull.
More importantly – again at least in our eyes – AstraZeneca has very low levels of debt and, as regular visitors will be aware, that is a huge factor for us when it comes to judging risk. As such, we believe Astra offers a margin of safety, with the risk of investors permanently losing money should the company suffer some unforeseen setback being perceivably low.
In articles such as Smoke and mirrors, we have previously highlighted parallels between the pharmaceuticals sector today and tobacco companies 15 or so years ago. one might continue this at a stock level by comparing Astra now with British American Tobacco (bat) in the early 2000s as back then that too was a stock most people saw as risky and so overlooked many of its high-quality aspects.
Setting to one side any moral judgements on the tobacco sector, bat enjoyed great pricing power, had sensible debt, generated huge amounts of cash and so on. It may not have been quite as large as AstraZeneca is now but it was still a FTSE 100 stock and a £6bn business and, as a result, many investors found it hard to believe it was really as cheap as it looked.
In fact, bat was what might be characterised as ‘value hiding in plain sight’ – turning out to be 1,000% cheap as its share price went up 10 times over the next decade or so. Now, we do not own AstraZeneca as the biggest position across our portfolios because we think it is 1,000% cheap but we do believe the risk/reward balance is of an order that suggests the business is hugely mispriced.
When it comes to value investing, some people think the skill lies in identifying cheap companies and yet, in many respects, that is actually the easy part. The real difficulty comes in buying cheap companies when others don’t, won’t or can’t. Ultimately, successful value investing comes down not to a clever screen of stocks but to your mind-set.
Fund Manager, Equity Value
I joined Schroders in 2001, initially working as part of the Pan European research team providing insight and analysis on a broad range of sectors from Transport and Aerospace to Mining and Chemicals. In 2006, Kevin Murphy and I took over management of a fund that seeks to identify and exploit deeply out of favour investment opportunities. In 2010, Kevin and I also took over management of the team's flagship UK value fund seeking to offer income and capital growth.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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