Global All Cap Strategy

March 2019

Major global markets moved higher in the first quarter, despite contending with a barrage of geopolitical pressures. Following the second rejection of her Brexit deal, Prime Minister Theresa May secured a two-week extension on the U.K.’s departure from the European Union (EU) with the exit date now set at April 12. The EU also offered a later exit date of May 22 should the prime minister ultimately receive approval from British Parliament on her version of Brexit before the end of March. In the meantime, members of parliament brought eight alternative plans to the floor, none of which achieved a majority. A subsequent third vote on May’s deal late in March also failed to pass, leaving Brexit very much in limbo.
Meanwhile, trade disputes proved challenging for the Chinese economy as February exports dropped over 20% from the year-ago period. The country’s industrial output growth also experienced its slowest pace of expansion in more than 15 years. In the U.S., even though manufacturing sector job growth at the end of 2018 was the highest it had been in the last 30 years, factory production during the first quarter reached the lowest level since 2017. Contrary to market analysts’ forecasts of gains, manufacturing output fell in January and February due to pressures of trade disputes and slower global growth. Monthly building permits also fell in excess of market projections. In Europe, the IHS Markit’s Purchasing Managers’ Index’s (PMI) March reading decreased to 51.3 from 51.9 the month prior, while the Flash Eurozone Manufacturing PMI sank to a near six-year low.
The European Central Bank announced increased stimulus, a decreased economic growth forecast for 2019 and a hiatus on interest rate increases until 2020. The Federal Reserve left key interest rates in the U.S. unchanged and noted it does not foresee raising rates in 2019, stating intent to employ patience and consider market concerns before taking action. Despite this, the reigniting of trade negotiations between the U.S. and China in the final days of March provided a late boost for global markets.
That being said, we use these periods of uncertainty in the market as opportunities to invest in temporarily undervalued companies by looking beyond readily available statistics to uncover hidden value. Our differentiated perspective comes from our unusually long time horizon, an unwavering focus on identifying quality businesses and a deep level of engagement with management teams.

Top Performers:
Mastercard delivered a strong fourth-quarter earnings report in January as exhibited by earnings per share ($1.55 ex-items vs. $1.52) and revenue ($3.81 billion vs. $3.80 billion) results that bested consensus estimates. In addition, we appreciated a 14% increase in gross dollar volume, cross-border payments growth of 17% that was in excess of its peers and guidance for another three years of “high-teens” earnings per share compound annual growth rate. In March, the company agreed to acquire global money transfer network Transfast. The transaction is expected to close in the second half of 2019. In addition, Mastercard announced a $300 million investment in the IPO from Network International for electronic payment progression in Africa and the Middle East. In our view, Mastercard is a quality business that continues to add value for its shareholders. As a whole, we are pleased with the company’s overall performance for our holding period thus far.

Lloyds Banking Group’s underlying fiscal-year 2018 results were largely in line with our expectations as lower credit costs offset slightly higher operating expenditures. That being said, the market appreciated the company’s announcement of a new share repurchase program for 2019 worth up to GBP 1.75 billion, up from GBP 1 billion in 2018 and higher than our expectations. Lloyds also guided for 14-15% return on tangible equity and further operating expenditure reductions in 2019. In addition, the company announced plans to switch its computer systems to a new platform, pending regulatory approval. Management expects the change will result in technology cost savings amounting to hundreds of millions of pounds annually. We continue to view Lloyds as a best-in-class financial institution.

Investors responded favorably to Travis Perkins’ fiscal-year 2018 earnings report. Full-year earnings finished roughly 2% ahead of our forecasts, driven by better performance in the contracts and consumer segments along with slightly higher property gains. The company’s performance improved markedly in the second half of the year, with earnings increasing about 11% year-over-year. Importantly, the Wickes business experienced a significant turnaround in the second half of the year with earnings up 4% year-over-year compared to a 41% decline in the first half of 2018. We appreciate management’s more cost-focused strategy over the last six months to more appropriately deal with the current market backdrop. Travis Perkins also announced the departure of current COO Tony Buffin as part of the earnings release, which we find to be a loss to the company. However, our investment thesis for Travis Perkins remains intact as we find that the stock is trading at a large discount to our estimate of the company’s intrinsic value.

Bottom Performers:
Bayer issued fourth-quarter results in February that included revenue, adjusted earnings and earnings per share that were ahead of market forecasts by roughly 4%, 5% and 34%, respectively. Furthermore, management confirmed fiscal-year 2019 revenue growth guidance of about 4% and reiterated Bayer’s overall 2022 targets. While we found these results to be acceptable, the company’s share price fell in March after a jury ruled in favor of a litigant and found that Bayer’s Roundup product (produced by Monsanto) was responsible for causing cancer. The jury later issued an award of slightly more than $80 million. Although this was the second time Bayer was found liable, management vowed to keep defending the safety of the herbicide glyphosate. Furthermore, we expect several more cases will emerge because of the outcomes of the initial two. Even though the juries’ conclusions were disappointing, we have factored potential future costs from litigation into our valuation metrics. We recently spoke with CEO Werner Baumann and discussed various possible scenarios specific to Roundup. Baumann believes an outright ban for Roundup in the U.S. is an extremely low probability because of the support for this product by regulatory bodies and how disruptive it would be to the industry since he estimates it would take about five years to build capacity for alternative herbicides. Baumann also expressed that the integration of Monsanto is progressing well. While we continue to monitor this situation closely, our investment thesis for Bayer remains intact.

Grupo Televisa’s full-year results included total revenue that matched our estimates and earnings that slightly outperformed our expectations. By segment, year-over-year content net sales (ex-World Cup) rose 7% and underlying advertising sales increased 2%, both of which aligned with our projections. The cable segment continues to drive results as net sales advanced almost 10% and revenue generating units (RGU) grew by 1.2 million for the full year with all sub-segments achieving RGU growth (broadband +18%, video +5%, voice +40%). Sky segment revenues were down 1% for the year because of subscriber losses after the World Cup broadcast. However, management expects Sky’s subscribers will return to positive growth in the second half of 2019. Despite these overall acceptable results, it appears investors were disappointed that management decided not to spin off the cable business. We met with CEO Alfonso de Angoitia Noriega and discussed rationale for keeping the cable business and operating trend expectations for the current year. He expressed that the costs and dis-synergies associated with the cable spinoff would not improve shareholder value. At this point, we agree with this assessment. In addition, Noriega noted that while the government’s decision to decrease advertising spending will impact current-year results, he expects private sector advertising will grow in a range of 2-3% in 2019, which we view as acceptable. He also supposes that the government will not cut spending further in the  near to mid term. Overall, we are pleased with the incremental improvements management continues to make and our investment thesis for Grupo Televisa remains intact.

Incitec Pivot experienced some unplanned plant outages during the first quarter. The Louisiana ammonia plant (WALA) and Phosphate Hill (Australia) fertilizer facility were shut down for repairs. Management estimated that these shutdowns would reduce current-year earnings by approximately AUD 45 million. Subsequently, adverse weather conditions in Queensland caused a rail line closure that will further impact Phosphate Hill production and result in an additional earnings loss of AUD 10 million each week until full production resumes. Accordingly, management warned that full-year profits would be below original estimates. On a positive note, issues at the WALA facility have been resolved and we expect operations will return to normal. Although we find the production stoppages disappointing, we believe these situations will have only a temporary effect on Incitec Pivot’s performance. 

During the quarter, we initiated a position in Booking Holdings. We also received shares of MultiChoice Group through a spinoff (Naspers), which we subsequently sold.


Past performance is no guarantee of future results.


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