THE DOW JONES BUSINESS AND FINANCIAL WEEKLY …

%

THE DOW JONES BUSINESS AND FINANCIAL WEEKLY



JANUARY 18, 2019

ROUNDTABLE

¡°Cadence

Design

Systems and

Synopsys are

positioned to

grow and add

more tools

over

time, and

¡°Cadence

have

an

Design

incredibly

Systems and

wide

moat.are

¡±

Synopsys

Todd

Ahlsten

positioned

to

Disney and 4 Other Stock Picks

From a Parnassus Fund Manager

Barron¡¯s recently held its 2019 Roundtable, a gathering of 10 of Wall Street¡¯s smartest investors. Here

are the stock picks of Todd Ahlsten, lead portfolio

manager of Parnassus Core Equity Fund at Parnassus Investments in San Francisco.

Barron¡¯s: Welcome aboard, Todd. Are you

warmed up?

Todd Ahlsten: I¡¯m warmed up. By way of introduction, I have been at Parnassus for 24 years.

My Parnassus Core Equity fund [ticker: PRBLX]

co-manager Ben Allen and I look for wide-moat

businesses that are durable, have pricing power,

and can prosper under a wide range of economic

circumstances. We also want companies that have

increasing importance to the economy and can

solve complex problems, which adds to their value.

We want seasoned management teams with skin

in the game, and companies with good corporate

governance, and we want to buy them when their

stocks are undervalued. Finally, we are ESG investors [focused on environmental, social, and

governance issues]. We seek outstanding corporate

citizens that favor diversity in management, are

good stewards of the environment, and are attractive places to work.

I grew up in the business covering the semiconductor industry, and my first two picks are in electronic design automation, or EDA. These companies

sell the tools to help design semiconductor systems.

Cadence Design Systems [CDNS] has a $12 billion

market cap, and Synopsys [SNPS] has a $13 billion

market cap. What we love about the industry is that,

over time, design is only going to get more complex.

Not only do these companies have a core set of customers growing revenue by the mid-single-digits,

but they are acquiring new customers. EDA tools

account for about 10% of semiconductor R&D spending. Cadence and Synopsys are positioned to grow

and add more tools over time, and have an incredibly

wide moat. Chip design is getting harder and more

complex, and only a few companies can provide EDA

tools. In addition, both companies are run by good

executives. Lip-Bu Tan has headed Cadence since

2009. He has integrity and empathy, and employee

retention is high. Aart de Geus was a founder of

Synopsys.

What are your expectations for the stocks?

Ahlsten: We see Cadence revenue growing by

roughly 8% a year, and the bottom line, by at least

10% a year. Operating profit margins exceed 29%

and can move up to into the 30s. Our timeline for

an investment initially is three years. Cadence is

currently in the low $40s and our three-year price

target is $61, based on a multiple of 25 times our

$2.44 earnings per share estimate for 2021. Synopsys trades at a slightly lower multiple of roughly 22

times earnings. Again, we see high-single-digit topline growth, and operating margins that are rising

from 22% this year to 26% in the fiscal year ending

in October 2021. In the next three years, the stock,

now in the mid-$80s, could trade up to $125, or 22

times estimated earnings of $5.60. Both Cadence and

Synopsys have almost no debt.

Cadence is strong in the analog and customizing

markets, whereas Synopsys is strong in the digital

intellectual property design market. Both are putting

their tools in the cloud, and increasing their number

of customers. Research and development in this industry almost never faces significant cuts. If you don¡¯t

design next-generation products, you die. To walk

down memory lane, the industry has consolidated in

the past 25 years, down to only three large players¡ª

the third is a unit of Siemens [SIE.Germany]. The

survivors are making semiconductors and systems

more energy-efficient, so there¡¯s a nice ESG story

here, too. Some of us talked at lunch about how capital

spending at Facebook [FB], Microsoft [MSFT], and

Google [part of Alphabet ; GOOGL] is going through

the roof. These EDA companies give them more efficiency in semiconductor use.

grow and add

more tools

over time, and

have an

incredibly

wide moat.¡±

Todd Ahlsten

+?RR


????j??? '?L??

?? 7?? ?

+?L?j¡À

'¡À?Lj

??{???

7Rj?Lj j??}? i{???¡¤

*???j?? ?

*

*??? ??? ? *'* o????

j7??¡ÀjR ?? D7¡À¡À????L??O

j¡À?j¡À ?

)

ix????

??Rj ? 

?x¡¤?¡¤?

27?? ???j? ? * ????¡¤?

+?RR

*??¡ÀLjO ????Dj¡À}


????j???

'?L??

?? 7?? ?

+?L?j¡À

(over '¡À?Lj

p lease)

??{???

The Publisher ¡¯ s Sale Of This Reprint Does Not Constitute Or Imply Any Endorsement Or Sponsorship Of Any Product, Service, Company

Or j??}?

Organization.

7Rj?Lj

i{???¡¤

Custom Reprints 800.843.0008 DO NOT EDIT OR ALTER REPRINT/REPRODUCTIONS NOT PERMITTED

*???j?? ?

*

*??? ??? ? *'* o????

j7??¡ÀjR ?? D7¡À¡À????L??O

j¡À?j¡À ?

)

ix????

Scott Black: If quantum computing takes

off, will these companies have the design

capacity necessary?

Ahlsten: That is a good question, but it is

outside our investment time horizon.

Next, we talked this morning about our

economic outlook. We see 1.5%-2% economic growth this year, and a wider range

of outcomes for earnings due to tariffs

and a slowing economy, but we still expect high-quality companies to compound

wealth. Cerner [CERN], a supplier of

health-care information technology, is our

third pick. It facilitates electronic medical

record-keeping [EMR]. The passage of

Obamacare was a major growth opportunity for the company, as it mandated a lot

of electronic record-keeping. The stock

went from roughly $20 to $75 from 2010 to

2015. We see continued opportunities for

the company to grow. We expect Cerner to

grow revenue by 7%-8% a year in the next

three years, and earnings by 11% annually.

Profit margins could grow by 30 to 45 basis

points [a basis point is 1/100th of a percentage point] a year. In the past several years,

operating margins have expanded to 24%

from 19%.

Cerner has front-loaded spending on

a large Veterans Administration contract,

which has depressed margins. So far, it

hasn¡¯t recognized revenue on it, but will

do so over the next 10 years. EMR is

becoming more important to patient outcomes, and we see partnerships with big

data-solutions providers like

[AMZN] and Google. Those companies are

great at crunching data, but Cerner owns

that last mile. The industry is a duopoly;

Epic [EPOR] is the other player. We like

that structure. Cerner is a $17 billion-market-cap opportunity to invest in health-care

IT. The balance sheet is pristine, with $300

million of net cash.

William Priest: The company has fairly

new CEO. He has been absent and hasn¡¯t

given any guidance to speak of.

Ahlsten: We had lunch with Brent Schafer,

the new CEO. We found him thoughtful.

Unlike a lot of new CEOs who make a major proclamation in their first 100 days, he

is taking time to understand the company

and talk to the sales force. Going into next

year, we¡¯ll get a lot more clarity on the

VA contract. EMR is a sticky business.

Whether GDP grows by 1% or 3% this

year, we estimate that Cerner can grow

the top line by 7% and expand profit margins. The company owns a lot of real estate

in Kansas City, Mo., and there is room to

rationalize costs. Cerner is a charitable

company and a good place to work, and has

a good reputation in Kansas City, which we

call the Silicon Prairie.

My fourth name is the old Praxair, now

known as Linde [LIN]. The company has

a fantastic global franchise. We like the

oligopoly structure of the industrial gas

industry. Industrial gases address climate

change because they reduce manufacturing

emissions in a lot of industries, including

metals production, mining, and energy.

Linde also has a unit that produces films

for solar panels. It fits our ESG mandate in

several ways. Praxair merged with Linde

in October 2018. The combined company

has roughly $30 billion of revenue, and operating margins of around 27.5%. We see

margins heading to 32.5% in the next three

to four years. The merger could realize

more than $1 billion of synergies. The stock

is trading for $156. We expect it to trade

for 11 times 2022 estimated enterprise

value to Ebitda [earnings before interest,

taxes, depreciation, and amortization], to

yield a price target around $202. The dividend yield is 2%. A recession would be a

risk to the markets that Linde serves, but

we don¡¯t see a recession around the corner.

In any case, the business is supersticky

and holds up well even when the economy

turns down. Linde has pricing power, due

to long-term take-or-pay contracts.

Priest: I would echo almost everything

Todd has said. Chemicals and energy are

19% of revenue, manufacturing is 18%,

health care is 17%, metals and glass are

13%, food and beverage is 7%, electronics

is 7%, and other is 19%. The CEO is outstanding.

Ahlsten: I also like Walt Disney [DIS].

Scott did a fantastic job of walking through

the thesis. The company has the best entertainment content in the world. It is undervalued, partly due to concerns about

subscriber losses at ESPN and the market disruption caused by Netflix [NFLX].

Without these issues, you don¡¯t buy a great

business at 15 times earnings. We think

Disney could earn $8 a share in 2022 and

fetch a price/earnings multiple north of 20,

which would put the stock at $160 a share.

By then, CEO Robert Iger¡¯s investments

in streaming media will bear fruit, and the

moat will widen. Disney is also a good and

charitable corporate citizen.

Nicely done. Thank you, Todd.

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download