Ask A Fund Manager
The Motley Fool chats with the best in the industry so that you can get an insight into how the professionals think. In this edition, Chester Asset Management portfolio manager Rob Tucker explains why he reckons two particular ASX 200 shares are the best buys currently.
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The Motley Fool: What are the two best stock buys right now?
Rob Tucker: It's a good question because I look at the 35 stocks in my portfolio and I think they're all quite interesting. That's why I own them! We're optimistic by nature.
I think Brambles Limited (ASX: BXB) is still a really interesting company. Because we're focused on assets that are really difficult to replicate, and I think Brambles has proven itself to have 360 million pallets, and a replacement cost to a pallet would be about $50 Australian. That would say the replacement cost of their asset base is about $18 billion, which is where the market cap is.
They've had competitors that in a lower interest rate environment have had access to capital and been competing on price. But now no longer, because interest rates have gone up, so their competitors are actually struggling.
Brambles has actually raised prices by 14% the last 12 months, and their customers need Brambles pallets because they're the only one that can supply them reliably with full service to every jurisdiction. This is the Walmart Inc (NYSE: WMT) and the Home Depot Inc (NYSE: HD) of the world in America. I think Brambles just has a pricing lever to play out over the next 12 months.
Now, the free cash generation of Brambles has always been tricky because of the capEx spend with the pallets. But the lumber prices have fallen 60% or 70% in the last 12 months, so I think there's a really strong free cash flow story to emerge with Brambles over the next 12-18 months.
MF: Are you worried about the US Dollar exposure at all?
RT: Again, I've been doing this for 22 years or so, so over that period of time, I've worked out you can't ever try and be too beholden to currency fluctuations. So I just try and say, "Well, I'm just trying to buy the best companies I can find."
The currency might sort itself out eventually. The US Dollar might be stronger in the short term for various terms. It might be weaker in the longer term because the US government has too big a fiscal deficit and expanding forever. I've got various thoughts about what happens to the US Dollar, but I'm not a currency expert. I'm not going to try and sit here and say I'm not going to have US currency exposure. I think Brambles is a good company.
MF: Your second best buy ASX share right now?
I would say the same thing for CSL Limited (ASX: CSL).
The last result, CSL's collection volumes increased by 36%. The working capital cycle says there's about 12 to 18 months, so that says to me there's a really clear line of sight to what their selling volumes can be in the next 12 to 18 months. As collections recover, the demand is still very strong so they'll have more product to sell over the next 12 to 18 months in their core business.
The Vifor acquisition will add certain products into their product suite and they've got a really impressive R&D portfolio, led by a product called CSL112. CSL112 is a — this might get a bit technical — a reconstituted, high-density lipoprotein, or RHDL. It is a waste product of the plasma fractionation process.
They have been trialling RHDL in humans for about the last eight years, and they're at the end of a phase three trial through about 1500 patients. What it does is if you've had a heart attack, because your cholesterol and your arteries [are] too high, this RHDL actually removes a lot of the cholesterol in your arteries. It's reducing the physical significance of having another heart attack if you've already had one.
It's an untapped market and it could be a material increase to CSL's earnings over the next three to five years, should this phase three trial be successful. But we've been speaking to a couple of cardiologists that say the statistical success rate is looking increasingly likely that this will end up being a commercial product. I think that's another leg of earnings growth over the next three to five years for CSL, which is probably not necessarily baked into the share price.
MF: Yeah, CSL's great that way, isn't it? It has the existing businesses that maintain its earnings momentum but also has these side projects going on that make it seem like a biotech startup.
RT: Yeah, and they've always had very conservative accounting. Full expense every bit of R&D they've ever spent. The headline PE you see for CSL, I think, is inflated.
They could easily cut $600 million out of their expense base because it could be capitalised. Because that's R&D spend on future products like CSL112. Their accounting standards are very, very conservative, which I think overstates the PE ratio.