Value Hunting: ADRs Earning Top Quality Scores

by: Steven Chen

The U.S. equity market keeps flirting with its previous all-time high.

If they haven't yet, it's time for U.S.-based investors to reduce their home bias.

A quantitative screening/ranking model might help to get a focus list in an efficient manner.

Source: CNN.


As the Warren Buffett Indicator keeps flirting with the all-time high (see below), long-term value/quality-focused investors in the U.S. may want to reduce their home-country bias a bit by looking overseas in order to expand the investable universe.

Source: GuruFocus; data as of 6/9/2019.

According to GuruFocus, the current Warren Buffett Indicator for the U.S. market stands at almost 140%, translating into an expected total return of -1.7% for the next few years. The calculation of expected returns also takes dividend yield and economic growth rate into consideration. The chart below compares the expected returns across major economies. The U.S. equity market has the lowest projected annualized market return among all.

Source: GuruFocus; data as of 6/9/2019.

With the advancement of information and financial technologies, the cost of investing overseas is getting lower and relevant research has been easier. Last year, I went through a couple of picks from my value hunting overseas (see Episode 1 and Episode 2). Today, I would like to run my Urbem Quality Scoring algorithm against the whole ADR universe and check out the top picks from this quantitative model.

Quality Score

For those who are not familiar with the Urbem Quality Score, the system is simply a quantitative model ranking businesses mainly based on the following fundamental factors:

  • Returns on capital and their consistency
  • Capex requirement to sustain year-to-year operations
  • Cash flow
  • Balance sheet
  • Growth health

I usually set the threshold of passing to the score of at least 60, which would give me around 80 stocks if the model is run against all U.S.-listed stocks, including foreign stocks. Below, I pick the four of them earning top Quality Scores for more analysis.

Novo Nordisk (NVO) (OTCPK:NONOF)

Source: Online.

Novo Nordisk is a global healthcare company with 95 years of innovation and leadership in diabetes care. According to Statista, around 326.5 million people aged 20-64 years had diabetes in 2017, and it is projected that this number will increase up to 438 million by 2045.

The management clearly demonstrated a decent capital allocation skill by delivering superior and improving returns on tangible equity over the years. Like many other drug companies, patent protection builds the economic moat for the short-to-medium term. I believe that the R&D power at the company would play the long-term key role in widening that moat.

Source: GuruFocus; data as of 6/9/2019.

As indicated below, the free cash flow has increased dramatically over the past dozen years. Going forward, the aging population, international expansion, strong pipeline (see below), and the chronic nature of the diabetes space should continue to benefit the shareholders in the long term.

Source: GuruFocus; data as of 6/9/2019.

Source: Novo Nordisk official website.

I am usually shy away from drug companies, as the success rate for developing a drug product from research to the market is extraordinarily low. Investors should bet on the highly predictable rather than the "miracle." However, Novo Nordisk is a unique species, in my opinion, thanks to its focus on key chronic diseases and the long-standing culture of innovation.

The share seems fairly priced if we compare the P/FCF to its historical average (see below). But a 23x P/FCF for a business growing at around 5% leaves very little margin of safety itself for any new investor. I would put this name on my close watch list and act when the P/FCF drops below 20x and/or new growth engine emerges firmly.

Source: GuruFocus; data as of 6/9/2019.


Source: Wikipedia.

F. Hoffmann-La Roche AG is a Swiss multinational healthcare company that operates worldwide under two divisions: Pharmaceuticals and Diagnostics. Roche is the third-largest pharmaceutical company worldwide. Roche Holding AG is the holding company primarily listed on the SIX Swiss Exchange.

The stock is obviously another play on the aging population. Like Novo Nordisk, Roche possesses strong innovation capability, being the world's largest spender in pharmaceutical R&D.

Source: Roche Fact Sheet, 2018.

The management seems to have allocated capital efficiently, delivering 10%-20% returns on tangible assets for more a decade now (see below).

Source: GuruFocus; data as of 6/9/2019.

Meanwhile, the business generates a good amount of free cash flow, with margins on sales of over 20% most of the time, free cash conversions of more than 100% all the time for the past decade (see below), and an upward trend of annual growth for recent years.

Source: GuruFocus; data as of 6/9/2019.

Source: Morningstar; data as of 6/10/2019.

Moving forward, the management is forecasting low to mid-single-digit percentage increases in both top line and bottom line for 2019. The long-term growth will be mainly supported by the strong R&D pipeline (see the pharmaceutical portion below), industry tailwinds, and possible M&A as well.

Source: Roche Fact Sheet, 2018.

In terms of shareholder structure, descendants of the founding Hoffmann and Oeri families own slightly over half of the bearer shares with voting rights, with Novartis (NVS) (OTCPK:NVSEF) owning a further third of its shares. Roche is one of the few companies increasing their dividend every year, for 2018 as the 32nd consecutive year.

Source: Roche Fact Sheet, 2018.

The stock looks attractive with a P/FCF of 15x at the moment especially if we consider that it was traded at above 15x most of the time for the past few years. For those interested in defensive plays along with steady dividend growth, Roche Holding could be a good candidate.

Source: GuruFocus; data as of 6/9/2019.

Dassault Systèmes (OTCPK:DASTY) (OTCPK:DASTF)

Source: Wikipedia.

Dassault Systèmes is the largest French software firm in terms of revenue; it is five times greater than that of the second largest. The company develops the 3D design, 3D digital mock-up, and product lifecycle management software.

Source: Earnings Presentation, Q1 2019.

Dassault Systèmes targets at 11 industries (see above), 7 of which achieved double-digit YoY growths for the business in the most recent quarter.

The large installed base across a diversified pool of clients builds a wide economic moat for the company and generates sizable recurring revenue (over 75% of the total sales). This also helped the management generate consistently high returns on tangible equity over the past two decades (see below).

Source: GuruFocus; data as of 6/9/2019.

Annual free cash flow grew dramatically over the same period. Like many other software companies, the FCF margin is high and the capex requirement is low (see below).

Source: Morningstar; data as of 6/10/2019.

Source: GuruFocus; data as of 6/9/2019.

The management has an aggressive target for growth moving forward - the bottom line to more than double in five years - which translates into a mid-teens CAGR. Major growths are expected to come from industry tailwind, product launch and possible M&A.

Source: Roadshow Presentation, Q1 2019.

For recent years, the market appeared to get excited about the story of Dassault Systèmes. As described below, the share has been trading at between 30x and 50x of the company's annual free cash flow since 2018 but at only around 20x a couple of years ago. Even with double-digit growth, I would wait patiently until the valuation cools down.

Source: GuruFocus; data as of 6/9/2019.

Infosys (INFY)

Source: Infosys official website.

Infosys is the second-largest Indian IT company, which provides software development, maintenance, and independent validation services to companies in finance, insurance, manufacturing, and other domains.

For a long time, Infosys used to enjoy the cost advantage thanks to lower wage cost in India. But these days may have already gone and the business has seen margin pressures. This could partially explain the downward trend in returns on tangible equity since the early 2000s (see below). The returns have been around 25% for recent years, demonstrating the management's capability of efficient capital allocation.

Source: GuruFocus; data as of 6/9/2019.

Annual free cash flow has increased moderately over the past decade (see below), mainly driven by the secular trend of adopting digital technologies. I do not see this industry tailwind to come to a stop for the foreseeable future.

Source: GuruFocus; data as of 6/9/2019.

The management forecasts a high-single-digit top-line growth for the upcoming fiscal year and plans to return 70% of free cash flow to shareholders through dividend and/or buyback. The remaining 30% would be either reinvested into the company's "Scale Agile Digital" initiatives or leveraged for acquisitions.

For the chart below, we can see that the P/FCF for the stock hit its recent bottom in 2017 due to the management change. Since then, the valuation has gradually improved. The share is currently traded at a P/FCF of 26x, which is close to its historical average but still high in terms of absolute value. Given the expected growth rate and the narrowing economic moat, I would wait for a more favorable entry point for this stock.

Source: GuruFocus; data as of 6/9/2019.


I believe that a quantitative screening/ranking model may be helpful to generate a focus list from the global stock market in an efficient manner. Four international stocks are introduced and discussed in this article: two recession-proof healthcare names with modest growths and two technology companies with higher growths.

Disclosure: I am/we are long NVO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please be aware that mentioning of any stock in the article does not constitute investment recommendations. Investors should always conduct careful analysis themselves and/or consult with their investment advisors before acting in the stock market.