Three quality companies with compelling prospects

Each week, a professional investor tells us where he’d put his money. This week: Michael Foster of the Ocean UK Equity fund highlights three favourites.

We seek out the highest-quality companies with the potential to deliver attractive returns. We look at aspects such as margin sustainability, culture, research and development (R&D) budget, vision and integrity of senior personnel, debt and – critically – attitude to debt.

We believe owning quality companies, especially during periods of heightened uncertainty and volatility, pays off over the long-term. As the famous American investor Peter Lynch pointed out, “more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves”.

Halma: a finger in several tasty pies

One top-notch stock is Halma (LSE: HLMA), a technology company operating in three areas: safety-critical systems (fire detection), environmental operations (water analysis) and medical equipment (ophthalmology). Its latest annual results were strong, with revenue up 13%, profit up 15%, the dividend 7% higher and debt cut by 17%.

Halma operates in sectors benefiting from structural growth, medical regulation and the urbanisation of the developing world. The company spent 11% of sales, £63m, on R&D and £29m on capital expenditure (principally driving automation through the business). It is worth noting that in the last 40 years Halma has only had three chief executives.

Diageo: pulling ahead of the competition

Drinks giant Diageo (LSE: DGEreported encouraging year-end results, demonstrating its strong competitive advantage. Sales grew by 5.8%, the dividend was up 5% and earnings per share (EPS) grew by 10% while free cash-flow generation was impressive. Marketing and capital expenditure are also being stepped up to support the ambitious medium-term top-line growth target of 4%-6%. Diageo’s targets also include achieving dividend cover of 1.8-2.2 times earnings.

Diageo has also committed itself to various endeavours that make it all the more attractive. For instance, the “grain-to-glass” project, which emphasises the company’s awareness of responsibility to consumers and overall sustainability, has resulted in a marked improvement in its carbon emissions and water efficiency.

LVMH: the leaders in luxury

LVMH (Paris: MC) is a global leader in the manufacturing and retailing of luxury products. There is only one manufacturer of Louis Vuitton luggage or of Dom Pérignon and Krug champagne. While there is competition from the likes of Kering, with brands such as Gucci and Yves Saint Laurent, arguably its biggest competitors are the counterfeiters.

LVMH’s broad range of products gives it a strong advantage over other leading brands. It manufactures and sells wines and spirits, fashion and leather goods, perfumes, cosmetics, watches and jewellery. Its operations are geographically diverse with a third of sales in each of Asia, the Americas and Europe.

Recently the group added to its product base with the purchase of Belmond, which offers hotels, safari camps, trains and cruises. Recent interim results saw sales grow by 15% and profits from recurring operations up 14%.