Q: After a strong EPS recovery in 2021, what’s your outlook for 2022 and 2023? Are rising input costs and supply chain issues dampening expectations?
Gandhi: Great question. First, let’s look at the market backdrop. In 2020, we shifted from a market driven by multiple expansion to one now driven by earnings growth, an environment better suited for our process. Year-over-year earnings growth moved firmly into positive territory in January 2021, and the market moved in line with that.
But that growth has stalled over the last few months, meaning earnings momentum has slowed. This results from everything we read in the headlines and what companies cite in their third-quarter earnings—component shortages, labor shortages, shipping delays, and higher energy costs. We hear inventory levels are low, and demand exceeds supply. We think these bottlenecks in shipping and supply chains are transitory and will unwind as supply improves. The recent earnings season suggested companies can pass through costs with demand remaining strong.
We expect earnings growth to reaccelerate in the first half of 2022. Non-U.S. earnings have made a full recovery and then some with 2021 EPS ending higher than their 2019 pre-pandemic peak. Once we get through these transitory friction points, we expect earnings growth to resume in the second half of 2022, with continued strength in 2023.
Three critical factors in this scenario include inventory replenishment after supply catches up to demand, consumers spending excess savings and a durable capital investment cycle.
Q: What opportunities are you seeing currently in non-U.S. companies?
Gandhi: There are many compelling stories right now. For example, Recruit Holdings in Japan is a human resource technology and media conglomerate. While its key business is the employment website Indeed, it also owns Glassdoor, the jobs site featuring employee reviews of employers.
The improving job market following pandemic-related lockdowns has accelerated growth for Indeed across Japan, the U.S. and Europe. Employers increasingly use Indeed to post job openings and identify candidates with specific educational and work skills.
We think Indeed has a long growth runway as it penetrates new end markets. Platform usage continues to grow as it disrupts the traditional brick-and-mortar model. Indeed’s addressable market is US$150 billion, which compares to the only US$3.7 billion in revenue generated last year.
Puma, the Germany-based branded shoe and apparel company, is another example. Puma has been consistently delivering 20%-plus top-line growth, higher than that generated by peers Nike and Adidas. The company has benefited from the shift in people wearing more athleisure products combined with new product innovations and category expansion.
Two years ago, for example, Puma entered the basketball category that Nike and Adidas dominate. It also recently reentered the performance running market with a new line of shoes. Recent sales growth has accelerated thanks to store reopenings and expansion of its online store. We believe the company has a long runway of growth given low market shares across its three main geographies.
Q: What are some examples of exciting growth companies that are domiciled outside the U.S.?
Gandhi: Our highest-conviction stocks we like are ones benefiting from a long-lived structural or secular inflection. We have various groups of stocks that group together into themes. One of them is a group of companies benefiting from investment in green energy and strategies to reduce carbon emissions.
Large, global leading companies benefiting from this investment cycle are more likely to be based in Europe than the U.S. Examples include Schneider Electric, Infineon Technologies and Iberdrola, all of which benefit from the shift toward renewable energy, such as wind generation and the growth in electric vehicles (EVs).
Infineon, for example, is a leading semiconductor company that makes specific chips to regulate the flow of electricity in an EV. Bureau Veritas is a test and inspection company that focuses on tracking carbon emissions.
Another theme that we like involves companies benefiting from the shift in the global manufacturing footprint. Production capacity is shifting out of China to lower-cost countries like Vietnam. In some cases, suppliers are moving closer to customers to reduce transportation costs and provide more just-in-time product flow.
Companies such as Keyence and Hexagon are beneficiaries of this capital investment as providers of sensors, cameras and measurement tools. Dassault Systemes is a crucial software provider supporting customers’ design and manufacturing processes.