Pockets of value in the bond market
Having experienced a significant bounce back from the falls in March, corporate bonds are not as...
Before the global lockdown some 15-40% of calories were typically consumed away from home, usually in restaurants*. But with ‘stay at home’ the mantra for many weeks, this number has shrunk to almost zero and the main beneficiaries have been grocery retailers, companies in their supply chains and, depending on the lockdown measures in place, app-based food delivery companies like Deliveroo.
But if the queues videoed outside the 33 re-opened drive-thru McDonald’s last weekend are anything to go by, fast food at least could see an equally fast come back, as lockdown eases and people tire of having to cook for themselves.
Will Warren, manager of Artemis US Extended Alpha fund, is one person who thinks this will be the case. He is invested in a number of companies that he believes should do well in a recession, such as fast food restaurants. “They are easy-openers and can quickly get back to levels seen before the crisis, as they don’t require much spend from consumers.” he said.
However, in his recent podcast, John Bennett, manager of Janus Henderson European Focus, urged some caution: “I think some industries will come out of the pandemic seriously impaired and you’re already seeing that with bankruptcies from coffee chains, fast food chains and apparel retail for example,” he said. “They were already very weakened business models in my opinion and so they’re not coming out of this – or if they are, it will be in a much shrunken state. It’s an oversupplied sector and capacity will come out.”
Fast food is a massive industry and liked by investors for a few reasons: first, it has historically shown strong growth during periods of economic expansion but also hasn’t collapsed during downturns, because any reduction in eating-out budgets in recessions tends to be at the expense of the full-service restaurant side of the industry. Secondly, profits tend to be robust thanks to the fact that labour, preparation, and ingredient costs are low.
However, barriers to entry are very small and consumer tastes frequently shift. This means that fast-food companies must continually improve their dining experience if they want to maintain or expand their market share. But the big brands like McDonald’s and Domino’s Pizza have shown they can endure for decades – against even the most intense competition.
McDonald’s is the industry’s biggest player and is a top ten holding in Lazard US Equity Concentrated fund**.
Jupiter Strategic Bond manager Ariel Bezalel also invested in McDonald’s bonds during the height of the recent market crash, when bond markets also fell and became much better value. An investment grade company, Ariel described McDonald’s as a “through-cycle” business.
Domino’s Pizza is a holding in Unicorn UK Smaller Companies^ fund. Talking to us in early March, manager Simon Moon said: “When you think about the input costs into a pizza, it’s fairly cheap, which makes it recession proof. The company also has a delivery system which is the envy of the likes of Deliveroo and Just Eat – it’s tied to a specific store so they can charge a bit more and tilt menu pricing. It’s a brilliant, cash-generative and relatively cheap business and is a long-term holding in the fund.”
And who hasn’t missed a decent coffee in the past few weeks? Starbucks, another holding in Lazard US Equity Concentrated fund, focuses mainly on beverage sales, but it is increasingly moving into the breakfast and lunch space.
In a recent update the managers said: “We have long admired category leader Starbucks, as the company dominates globally through its approximately 31,000 locations (of which roughly 6,000 are in the US or China), as well as through its other significant points of distribution, including digital. It has dominant market share, high margins, and attractive growth profile.
“Although store closures and reduced consumption will undoubtedly impact 2020 results, we believe Starbucks is making sound financial and social decisions, which will enable it to recover more quickly than most consumer companies once consumer confidence returns.”
*Source: Lazard Asset Management, 31 March 2020
**Source: Fund Factsheet, April 2020
^Source: FE Analytics, full holdings as at 30 April 2020