THINK GLOBAL.

LOSE THE HOME BIAS. Hello Europe. We look at six high-quality European companies that offer investors exposure to new sectors and company sizes.

■ Reckitt Benckiser Group plc ■ Nestlé S.A. ■ Novartis International AG

■ Bayer AG ■ BASF SE ■ SAP SE

Nestlé S.A.

Nestlé is a Swiss transnational food and beverage company headquartered in Switzerland and it employs over 339,000 people in 447 factories in 194 countries. Nestlé was formed in 1905 by the merger of the Anglo-Swiss Milk Company and Farine Lactée Henri Nestlé, founded in 1866 by Henri Nestlé. It has made a number of corporate acquisitions over time and has grown significantly to expand its offerings beyond its early condensed milk and infant formula products. As the largest packaged food and beverage firm in the world by revenue, Nestlé is one of the leading players in a number of categories, including beverages, dairy products, confectionery, and pet care. Its product breadth makes Nestlé a core supplier to grocery stores across the world, and its distribution network is extensive. It is also one of the main shareholders of L’Oreal, the world’s largest cosmetics company. Some of the well-known brands under Nestlé include Nespresso, Nescafé, Kit Kat, Smarties, Nesquik, Stouffer’s, Vittel, and Maggi. More than 20 of Nestlé ‘s brands each generate in excess of CHF 1 billion annual sales, and the firm is particularly dominant in the bottled water category, fending off competition from beverage behemoths Coca-Cola and PepsiCo. As a result, Nestlé is in a relatively strong position to negotiate with retailers for primary shelf space in stores. Even with its leading position, the firm is not content with the status quo, but continues to seek opportunities to enhance its competitive positioning by leveraging on the strength of its brands and the diversity of its product set.

Reckitt Benckiser Group plc

Reckitt Benckiser is a multinational consumer goods company headquartered in Berkshire, England. It has operations in around 60 countries and its health, hygiene and home products are sold in almost 200 countries. Reckitt recently demerged its pharmaceuticals business to become a pure consumer products company, generating most of its sales from healthcare and hygiene products. The two main divisions are Health at 31% of revenue and Hygiene at 41% of revenue while Home and Food contribute 20% and 4% respectively. It has 19 “Powerbrands” (those with above average growth potential), which make up over 80% of the company’s revenue. Some of its commonly used household products include Finish dishwashing detergent, Woolite fabric softener, Lysol cleaner, Clearasil face wash, the antiseptic Dettol, Strepsils, Nurofen, the hair removal brand Veet, the air freshener Air Wick, Lysol, and Mortein. The company has garnered market share leadership in a number of niche categories but given that this company operates in a highly competitive space, it regularly introduces new products in order to keep consumers loyal to its own categories and brands. Also, the group’s strategy is to focus on the higher margin divisions of Health and Hygiene and increase exposure to higher growth regions/emerging markets.

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Novartis International AGNovartis is a Swiss multinational pharmaceutical company based in Basel, Switzerland. It has three operating divisions: Pharmaceuticals, Alcon (eye care) and Sandoz (generics). Novartis operates directly and through dozens of subsidiaries in countries around the world. Some widely-used drugs that Novartis manufactures include Clozaril, Voltaren, Tegretol, Lamisil and Diovan. In July 2015, Novartis had a market-cap of around US$280 billion making it the largest healthcare company by this metric. Novartis derives its strength from a diversified operating platform that includes branded pharmaceuticals, generics, eye care products, and consumer products. Although the majority of its competitors focus solely on the high-margin branded pharmaceutical segment, Novartis runs several complementary operations that reduce overall volatility, provide a stable stream of earnings and create cross-segment synergies. Also, Novartis’s leading number of pipeline drugs designated as ‘breakthrough therapies’ is likely to yield further market share with strong pricing power. With strong positions in multiple key healthcare businesses, Novartis is well-positioned for steady long-term growth.

Bayer AG

Bayer is a German multinational chemical and pharmaceutical company founded in Barmen Germany in 1863. Bayer’s primary areas of business include human and veterinary pharmaceuticals; consumer healthcare products; agricultural chemicals and biotechnology products; and high value polymers. The company’s business operations are organized into three subgroups: Bayer HealthCare, Bayer CropScience and Bayer Material Science, supported by the service companies Bayer Business Services, Bayer Technology Services and Currenta. Its first and best known product was aspirin and it also introduced phenobarbital, prontosil, the first widely used antibiotic. In 2014 Bayer bought Merck’s consumer business, with brands such as Claritin, Coppertone and Dr. Scholl’s. A number of factors make this company attractive: Bayer is launching several new drugs that hold blockbuster potential and solid pricing power; its strong entrenchment in biologics helps protect the firm from generic competition, as generic biologics look more difficult to develop, manufacture, and market; the company has been establishing a strong presence in emerging markets and is well positioned to benefit from these fast-growing regions.

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CHEMICAL & PHARMACEUTICALS

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BASF SEBASF is the largest chemical producer in the world and is headquartered in Ludwigshafen, Germany. This giant chemical conglomerate comprises subsidiaries and joint ventures in more than 80 countries and operates six integrated production sites and 390 other production sites in Europe, Asia, Australia, Americas and Africa. It has customers in over 200 countries and supplies products to a wide variety of industries. Despite its size and global presence, it has received relatively little public attention since shedding its consumer businesses and gradually moving over the past decade to shift its product mix to more specialised offerings. BASF sports impressive scale in chemical production and its Verbund concept--essentially grouping many chemical plants together--gives BASF a cost advantage over its competitors. BASF is consciously shifting its product mix toward more specialty products with less revenue cyclicality. Today, management characterizes about 60% of the firm’s portfolio as specialty and plans to move that mark to 70% by 2020. Unlike many of its chemical peers, BASF operates its own upstream oil and gas production, concentrating in regions in Europe, South America, Russia, and the Caspian Sea. BASF also operates a natural gas trading, transport, and storage business. The company’s oil and gas assets provide a hedge to feedstock price fluctuations and this, combined with a solid portfolio of specialty products, creates substantial competitive advantages.

SAP SESAP SE (Systems, Applications & Products in Data Processing) is a German multinational software corporation headquartered in Walldorf, Germany with over 282,500 customers in over 180 countries. SAP sells licenses for software solutions and related support services. It also offers consulting/ training for its software solutions and services around 25 industries including consumer, discrete manufacturing, energy, natural resources, and financial services. Since 2012, SAP has acquired several companies that sell cloud-based products, and it is estimated to generate US$2 billion of cloud revenue in 2015. It is the largest enterprise resource planning (ERP) software company in the world and is among the leaders in other categories of business applications. SAP’s installed base of ERP customers is largely stable as the clients face substantial switching costs. This also provides SAP with valuable time to develop its portfolio of cloud software products. SAP’s recent in-memory database platform HANA is a powerful real-time analytics tool and is one of the fastest-growing databases in the industry, representing a good upsell opportunity into SAP’s existing installed base. Overall, we believe SAP’s cash flows generate excess returns that the company can return to shareholders while also reinvesting in the business.

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