It’s in the nature of some industries that their profits boom and bust with the economic cycle. However, there are others — so-called defensive industries — whose profits are far less dependent on the macroeconomic backdrop. I reckon investing in high-quality operators in these industries, when their shares are trading at reasonable prices, is a sound strategy for steadily building long-term wealth.
With this in mind, two FTSE 100 stocks I’d be happy to buy today, and hold forever, are Smith & Nephew (LSE: SN) and Coca-Cola HBC (LSE: CCH). Let me tell you about the particular attractions I see in these two businesses, and why I think their shares are currently reasonably priced.
Rising demand
Medical technology specialist Smith & Nephew operates in markets that are structurally and demographically attractive. Ageing populations, with more people being physically active for longer in retirement — wanting to enjoy travel, sports, and so on — means there’s rising demand for SN’s products.
The group has three business units: Orthopaedics (includes knee and hip implants); Sports Medicine (includes joint repair); and Advanced Wound Management. In a Q3 trading update today, it reported strong revenue growth of 6.5% (4% underlying), with all three franchises contributing. Geographically, emerging markets (19% of group revenue) delivered underlying growth of 16%.
Heading for above-market growth
SN’s Q3 revenue performance was built on first-half momentum, and led management to upgrade its full-year guidance for the second time this year. Ahead of today’s results, City analysts were forecasting full-year earnings per share (EPS) of 79p which, at a current share price of around 1,700p (a little down on the day), gives a price-to-earnings (P/E) ratio of 21.5.
The shares were not far off 2,000p as recently as last month, and I think the dip represents a good opportunity to buy in. The announcement of a change of chief executive is partly responsible for the recent weakness, but I don’t see this as a major concern.
The company is growing its underlying revenue in line with the attractive 4% average growth of its various end-markets. And I think improving operational performance and recent product acquisitions will translate into above-market growth in the coming years. In view of this, SN’s premium P/E rating is not at all unreasonable, in my opinion.
Brands are the business
Coca-Cola HBC — one of the largest bottling and distribution partners of The Coca-Cola Company — also trades at an above-market-average earnings multiple. And I think this is reasonable too. At a share price of around 2,340p, with City forecasts of EPS of 123p, the P/E is 19.
Operations in 28 countries, and excellent exposure to fast-growing developing markets (20% of revenue) and emerging markets (43%) are engines for growth. Management has guided on underlying revenue growth of 5-6% for the current year, with margin expansion pushing up profit at an even faster rate. Meanwhile, brand strength and repeat purchases of what are affordable drink treats, including Coca Cola, Sprite and Fanta, give CCH defensive qualities.
The Coca-Cola Company’s acquisition of Costa Coffee from Whitbread earlier this year provides CCH with yet another strong brand and growth engine. It’s preparing to launch Costa Coffee in 10 of its markets in 2020, expanding into all its markets over the following three years. I reckon CCH is another stock with outstanding buy-and-hold credentials.
