Simon Fennell: Our International Growth Fund seeks to invest in foreign companies across the market cap spectrum with superior quality and growth characteristics relative to competitors. As you know, our approach here is to look for high free cash flow stocks. There are four names I wanted to speak about today.
The first is a Japanese company, Astellas Pharma (OTC: ALPMY). This is a large-cap Japanese pharma company—about $26 billion in total market cap. The focus of the company is urology, immunology, and, most importantly now, oncology. It is international in focus, with about 43% of sales being international. The rest is Japanese.
It is quite well split in terms of domestic sales, but with an international element to it. The key driver for the stock here is the prostate cancer drug XTANDI, which it has co-developed with Medivation, Inc., a biotech company in the United States.
The area that we are talking about in terms of prostate cancer is an incredibly important one with a patient population that is needy for drugs that have good efficacy, and XTANDI is gaining very good traction in prostate cancer and potentially in further indications outside of that. The story for this is a strong underlying business. Its regular business in urology is still doing particularly well with good growth. But new areas like prostate cancer—and even more importantly beyond that—are the potentials for the company from here.
There are some significant numbers out in the marketplace for peak sales potential of XTANDI north of $4 billion, or even more by some estimates. We might not be quite as aggressive as that in our views of what it can do. But with a decent number of studies still in the marketplace at the moment, we believe that XTANDI can be quite a transformative drug for the company.
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Forbes: It sounds very interesting indeed.
Fennell: The second company I wanted to highlight is called NXP Semiconductors (NASDAQ: NXPI). NXP is a semiconductor company with a previous history within the Philips Group. This is one of the leading suppliers of mixed-signal and analog semiconductors on a global basis.
It has very solid positions in five main product segments: automotive, identification and security, and the industrial side with about 15% of revenue; it has a computing element to it; and then it has a large, standard component product group that is about a quarter of revenue.
But the story here is that the growth segment of the high-value-added product is moving particularly well with a 10% to 15% growth rate—if not even slightly higher than that. It is very integrated into identification and next- generation passports and IDs. It is very integrated into the automotive industry with new silicon elements including infotainment, keyless entry, and the "smartification" of the car. It has a very interesting financial model. Gross margins approach 50% and the operating margins are around 25%.
It has significant free cash flow generation with a very solid buyback in place. So this company has both a great business model as well as a strong financial model at the moment. The numbers that came out for the first quarter were particularly strong. Revenue was up about 14% year-on-year and that was significantly ahead of consensus.
So it has done particularly well and we believe that it can continue to do so. Revenue guidance for the second quarter was ahead of expectations, and it is really the free cash flow generation story that we find most interesting and you get leadership on a global basis.
Forbes: Sounds like another strong one.
Fennell: The third company is InterContinental Hotels Group (NYSE: IHG) in the hotel sector. This is a $9.5 billion market-cap company and one of the global leaders in the hotel market: close to 4,700 hotels in 100 countries and more than 300,000 employees.
Forbes: Wow. That's big.
Fennell: Its main brand is InterContinental itself but also Holiday Inn, Crown Plaza, Hotel Indigo, and many others worldwide. Like many others in the hotel industry, it is moving to a management model that has very high returns. As I mentioned, those returns are a focus for us broadly. Here the return on investor capital is north of 30%. It is very shareholder focused and there is significant dividend growth here both in the underlying free cash flow and also from special dividends.
It is continuing to sell parts of its estate and then siphon that money back to shareholders. But that is not really the only story here. The underlying growth currently is quite nice, about 5% to 6% revenue growth and particularly strong in the United States.
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