Magnificent Seven vs GRANOLAS – what investors need to know, plus 3 share ideas

ASML

The only tech name out of the GRANOLAS is Netherlands-based ASML. It’s the global leader in lithography machines, a vital part of producing the microchips that power electronic devices.

ASML’s the sole producer of the most advanced type of lithography machine, called High-NA Extreme Ultraviolet (EUV) lithography. It took over 20 years to research, develop and commercialise the technology involved in EUV – which is now a very wide moat for any competitor to try and cross.

With the AI boom fuelling demand for the most powerful kind of chips, ASML finds itself essentially selling the picks and shovels in an AI gold rush. The group’s revenue and operating profit jumped around 30% and 39% respectively in 2023.

Longer-term trends like growing data volumes, increased demand for electric vehicles, and the energy transition underpin forecasts that the overall semiconductor market could more than double by 2030.

Given this outlook, ASML’s expecting a more than 100% uplift in its sales and to significantly expand its margins by the end of the decade, which we think looks achievable.

The company’s capacity to manufacture and deliver its machines is a potential constraint on growth. Ambitious plans to increase headcount and production capacity are underway, but the highly-qualified labour needed is in short supply and doesn’t come cheap. Thankfully, there’s plenty of cash on hand to help fund these efforts.

The market’s taken notice of ASML’s monopoly in the space though. At a lofty valuation of 42.6 times next year’s expected earnings, there’s serious pressure on ASML to meet market expectations. Potential investors should be aware that the valuation’s likely to be punished if the group fails to deliver.

GlaxoSmithKline

Given the number of pharmaceutical companies that make up the GRANOLAS, we’d be remiss not to dive into one.

GlaxoSmithKline (GSK) is a fully focused biopharmaceutical company. It’s been more than a year since it spun off its consumer health division, which included brands like Sensodyne toothpaste, Panadol painkillers and Centrum multi-vitamins into Haleon, and we’re impressed by the progress it’s making.

In 2023, revenue grew 14% to £30.1bn, excluding pandemic-related sales which now only make up a small amount of the total. There were also four major product approvals in the year and there’s potential for more clinical milestones in 2024. Although, there’s no guarantee of continued success.

Underlying operating profit rose by 12% to £8.8bn, helped by a growing contribution of royalty income. HIV medicines are a key area for the business. Newer treatments are now gaining traction, as generic competitors eat away at the pricing power of some of its legacy products.

Vaccines are proving to be a major growth driver too. The recently approved respiratory syncytial virus (RSV) vaccine, Arexvy, has made a good start following its commercial launch. There’s more market share to go for, but it faces some tough competition.

Strong cash flows and manageable debt levels help underpin a prospective dividend yield of 3.8%, although this isn’t guaranteed. This also supports selective acquisitions which are adding to the healthy research pipeline.

GSK’s valuation is much less demanding than its peers. In part, this might be due to questions over cancer links to its heartburn drug, Zantac. A key legal hearing is well underway, with markets expecting settlement to be the most likely outcome.

Overall for GSK, continued execution of the growth strategy and a strong clinical pipeline could reward investors willing to ride out any possible storms. Of course, there are no guarantees, and the ride could be bumpy.

LVMH

LVMH is Europe’s luxury powerhouse. It’s a conglomerate of high-quality names like Louis Vuitton, Christian Dior, Givenchy, and TAG Heuer to name a few. Simply put, it offers unparalleled breadth and scale in the luxury sector.

The group’s performance has been commendable in recent years, far outpacing the broader market. In 2023, revenue rose 13% on an organic basis to €86.2bn. All divisions recorded organic growth apart from Wines & Spirits.

A slowdown in one division is something to watch, but it’s not something we’re overly worried about. Especially in a company of LVMH’s size.

The largest division, Fashion & Leather goods, has continued to post robust growth figures. These kinds of items are status symbols, and the group’s mega-wealthy customer base tends to be undeterred by sky-high prices.

Being able to charge such prices for products means operating margins are healthy, currently floating in the mid-twenties. That helped LVMH to grow its profits from recurring operations by 8% to €22.8bn last year.

Group CEO, Bernard Arnault, has been at the helm for the better part of 40 years. He’s the largest shareholder and his family owns 48% of the shares, which probably explains the focus on long-term success.

On the flip side, this raises questions about succession plans. When the day comes for him to step down, there’s likely to be some short-term turbulence. And longer term, there’s no guarantee his replacement will have the same level of success.

The valuation’s broadly in line with its long-run average of around 23.3 times forward earnings. Compared to peers, that’s middle of the pack. To us, it suggests that not all of the group’s strengths are currently priced in, and could offer an attractive entry point. However, of course, there are no guarantees.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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