The Hidden Value of Multinationals

Right now, you can buy dominant, globally competitive, well-capitalized businesses at absolutely cheap valuations. People are dumping the best companies and buying bonds because they're worried the U.S. economy won't grow. The bad news is already largely priced into these stocks, and value is hiding in plain sight. You can buy Johnson & Johnson (JNJ) at a price multiple of 8.5 times cash flow—a ridiculous valuation for one of the best companies in the world with a great balance sheet, great management, and a diversified business. You also can buy Wal-Mart (WMT) at 12 times its earnings. Historically, such bargains have been much harder to find in large globally competitive companies.

If you looked at our portfolio, it would seem like we're overweighting U.S. stocks. It's not that we're particularly enthusiastic about the U.S.; we're just enthusiastic about equities we're finding there. Many have no more exposure to the U.S. economy than European companies we own. They simply happen to be based in the U.S.

Where a company's stock is listed is largely not meaningful from an economic standpoint. People think it is, and that misperception creates bargains. Take Novartis (NVS), a company we own. It's a global pharmaceutical company based in Europe, but its geographical distribution of profits is not much different than that of a Johnson & Johnson or a Becton Dickinson (BDX), which are based in the U.S. We also recently bought MasterCard (MA). Concerns about its business in the U.S.—and U.S. equities in general—have driven it to a very cheap price of about 8 times its cash flow. Most of its revenues and profits, however, come from outside the U.S.

It's true that there's more economic growth in emerging markets, but that growth doesn't necessarily equal investment opportunity. It's cheaper to get exposure to emerging markets by owning multinationals based outside of them, and I have plenty of exposure to them this way. One of our larger positions is Unilever (UN). It's based in the U.K. and the Netherlands, but emerging markets account for 50 percent of its business. If its emerging-markets businesses were listed in their local markets, they would be selling for 30 times earnings; but now you can buy Unilever for 13 times earnings. 3M (MMM) is another company we own that has significant exposure to emerging markets, as do Procter & Gamble (PG) and Wal-Mart.

The economic environment is highly uncertain, and that is why you can buy great businesses at the valuations that you are able to today. The math can significantly work in your favor over the next few years, even in a no-growth environment. When things are uncertain and people are fearful, you have to take advantage. You are not going to get a bargain when people think equities are the greatest thing since sliced bread.

The Stats: Daniel O'Keefe is lead portfolio manager of the $33 million Artisan Global Value Fund (ARTGX), which opened in December 2007. He also co-manages the $2.8 billion Artisan International Value Fund (ARTKX), which has beaten nearly 90% of its peers in the past five years. In 2008, Morningstar (MORN) named him and co-manager David Samra fund managers of the year for their work at the International Value Fund.

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