Europe: New "Old World" Picks

05/13/2014 9:00 am EST


Yiannis Mostrous

Editor, The Capitalist Times

On a price-to-earnings basis, European equities trade at their highest multiple in more than a decade, cautions international investing expert Yiannis Mostrous; as such, the editor of Capitalist Times emphasizes that selectivity is the key to choosing European stocks.

Several headwinds have prevented European stocks from heading higher: Tension between Russia and Ukraine and fears of slowing economic growth in emerging markets have increased the uncertainty surrounding corporate earnings.

Earnings growth will be critical to push stock prices higher and convince the market that shares aren’t expensive. Meanwhile, with the ratio of capital expenditures to sales at a 30-year low in Europe, an increase in investment appears imminent. Against this backdrop, here are three new picks in the “old world.”

BASF ((BAS:GR) in Frankfurt) and (BASFY:OTC)

With about US$100 billion in annual sales and a diverse geographic footprint, BASF is one of the world’s largest integrated producers of commodity chemicals. It also boasts the largest footprint in Mainland China of any Western chemical producer.

Concerns about BASF’s oil and gas business appear overblown. Investors have worried that the turmoil in the Ukraine could affect the company’s interests in Russia, but the German government has guaranteed more that 90% of BASF's original investment in the country.

In 2012, BASF announced a restructuring effort to reduce costs and improve operational efficiency. These initiatives already have delivered EUR600 million (US$830 million) in cost savings, while management’s guidance calls for another EUR400 million in savings by next year.

In addition to cost savings, BASF should also benefit from the gradual improvement in the EU economy, as well as explosive growth in the auto and agricultural end-markets.

BASF has a long history of returning cash flow to shareholders. In fact, management recently affirmed its commitment to raising the dividend each year. With a dividend yield of 3.6%, BASF rates a buy up to EUR90 in Frankfurt; its ADR is a buy up to US$124.00.

ING Groep ((INGA:NA) in Amsterdam) and ((ING:NY) in New York)

Netherlands-based financial giant ING Groep continues to deliver on a restructuring plan that aims to simplify its operations and refocus on the company’s core strengths. The effort began four years ago, when the company announced plans to dispose most of its sprawling insurance operations.

By the third quarter of 2015, ING should be on sound financial footing. The company should be able to repay the state aid it received during the financial crisis with the proceeds from the initial public offering of its European insurance business and the disposal of its noncore assets in the US and other far-flung markets.

With many of its peers still focused on repairing their ailing balance sheets, ING should be able to benefit from the EU economy’s ongoing recovery. And the firm should fair even better once the Dutch economy—especially the housing sector—turns the corner.

Until then, ING's Dutch retail business continues to generate a profit, and its operations in Belgium and Germany continue to do well.

Management has reinforced that the company will resume paying a dividend sometime next year and has targeted a return on equity of 10% to 13% in 2014, compared to 9% in 2013. A leveraged bet on Europe’s economic recovery, ING Groep’s ADR rates a buy up to US$15.00.

Vinci ((DG:ENX) in Paris) and (VCISY:OTC)

With annual sales of more than US$51 billion, Vinci is Europe’s largest integrated construction and infrastructure outfit.

Concessions, mainly toll roads, account for about 62% of the firm’s earnings. The company offers direct exposure to Europe as the Continent is responsible for 86% of sales, with 62% of it coming from France where Vinci controls over 50% of tolled motorways.

Acquisitions will continue to drive much of the firm’s earnings growth. Fiscal austerity has limited the pipeline of new construction in Europe, but cash-strapped governments have sought to shore up their balance sheets by monetizing infrastructure assets.

Vinci took advantage of this trend in December 2012, beating out four rivals to acquire Portugal’s state-owned airport operator ANA and its 50-year concession to run the nation’s airports, and the company has identified the airport concession segment as a key growth area.

With a 3.3% dividend yield, Vinci’s local shares remain a buy up to EUR60.

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