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Monthly Report: International Fund October 2019

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International Fund October Monthly Report

Zebra Technologies (NASDAQ:ZBRA) posted strong third quarter results and pleasing fourth quarter guidance. High margin additions including software, services and artificial intelligence are growing in importance. The company is reconfiguring its supply chain to mitigate the impact of trade war tariffs.

Zebra continues to make significant market share gains versus competitors, recently announcing its largest ever contract win with the US Postal Service. This one contract could add more than $500m to revenue in 2020/2021, about 10% of group sales. The stock reached an all time high price soon after the result and remains an attractive investment.

Auto supplier Lear Corporation (NYSE:LEA) reported a decent third quarter in a trying global market. Its seating division, which accounts for 75% of sales, reported a small increase in revenue and a small reduction in underlying margin. The historically higher margin E-Systems business came under more pressure, with sales down 8% to $1.1bn and adjusted earnings down 42% to $85m.

Both segments suffered from the strike at largest customer General Motors (NYSE:GM), which started mid September and carried on into October. As a result, management cut its full year sales outlook 4% to $19-19.5bn and adjusted net income by about 13% to $765-845m. Interestingly, those forecasts were based on the GM strike continuing for at least a few weeks. It ended the same day Lear reported.

New Stocks

Well known for televisions and audio equipment, that’s not where most of the value is found in today’s Sony Corporation (TYO:6758). Sony owns the world’s largest video game platform (PlayStation), the second largest music label and fifth largest Hollywood film studio. It also controls more than 50% of the image sensor market through its semiconductor division. The latter division reported strong growth in the latest quarter due to both market share gains and the proliferation of cameras and visual sensors on newer generation smartphones, tablets, laptops and automobiles. Xiaomi (SEHK:1810) and Oppo, two of the largest smartphone manufacturers globally, recently announced that they will be using Sony image sensors in their newest handsets.

Another recent investment is Yum China (NYSE:YUMC). The US-listed spinoff from Yum Brands (NYSE:YUM) owns KFC and Pizza Hut in China. The abridged thesis is that Yum China has a long runway for new store openings at high incremental returns on capital. That’s particularly valuable in a world of miniscule interest rates. In the third quarter, revenue and operating profit increased 5% and 11% respectively, despite a 3% currency headwind. Highlights included the 7% increase in store count to more than 8,900 restaurants. Despite higher wages and chicken prices, the company refined its menu, delivery services, marketing and staffing and thus improved margins. We expect a more challenging quarter ahead. Chicken costs, inflated indirectly by the African swine fever outbreak, remain high. Management is hastening the pace of store expansion and remodelling. This hampers sales and margins but adds value long term.

The Fund participated in its first initial public offering (IPO) in June. We got interested in the Norwegian research-focused company Norbit (OB:NORBIT) after it needed to reprice its IPO to attract sufficient investor interest.

Norbit’s Oceans division makes integrated sonar units— smaller and easier to use than competing alternatives—that are expanding the sonar market globally. The ITS division produces dedicated short-range communication solutions, chiefly for tolling and tachograph systems. Two new agreements with customers Continental (DB:CON) and Toll Collect underwrite substantial revenues over the next five years at unusually high margins, approaching 40%. The recent third quarter result was disappointing from the Oceans division, particularly in Asia. But it was offset by a record quarter of sales and profits from ITS.