Global Trio: Driving, Banking, Gambling

05/29/2014 10:00 am EST


Philip Springer

Chief Investment Strategist, Personal Finance

Although the US remains the single most attractive market, in our view, Europe is showing signs of improvement and the emerging markets are cheap, boosting their relative appeal, suggests Philip Springer in Personal Finance.

The S&P 500 (SPX) trades at 16.5 times projected 2014 earnings. For Europe’s developed markets, the price-to-earnings (P/E) multiple is 15. And for the emerging markets overall, it’s 11.1.

In Europe, we like companies with strong global franchises in luxury goods. Germany-based Daimler AG (DDAIF) is a leading producer of luxury cars and the world’s largest manufacturer of commercial vehicles, under the Mercedes-Benz, Daimler, and other names.

In March, the company sold more vehicles in a month than ever before. And now sales are picking up in Europe, after six sluggish years. Growth for its cars has jumped by 10% or more year-over-year for nine months in a row, led by several new models.

Daimler has a strong balance sheet and just declared its annual dividend, equivalent to a 3.3% yield. The stock carries a low P/E of 11. Buy Daimler AG up to 97.

Another salient theme in Europe is restructuring and industry consolidation, particularly among banks, and notably, in Spain. Consolidation means fewer competitors and higher profit margins as the recovery quickens.

As Spain’s largest lender, Banco Santander SA (SAN) is a clear beneficiary. It’s also one of the world’s largest banks, with over $1 trillion in assets and broadly diversified.

The bank’s stringent lending standards helped it to avoid many of the problems of the financial crisis. Meanwhile, cost controls, combined with decreasing provisions for loan losses, are boosting profits.

The stock trades at about book value, versus two times book before the crisis. With a P/E of 13 times expected 2014 profits and a 6.2% yield, Banco Santander SA rates a buy up to 12.

Perhaps the best way to invest in the rising affluence of emerging markets is through gambling in Asia. Melco Crown Entertainment Ltd. (MPEL) owns and develops casinos and resorts in Macau, on the southeast tip of China.

Melco opened its City of Dreams casino in 2009, and a second casino, Macau Studio City, is expected in mid-2015. The Macau market is expected to grow at a 10%-plus annual rate and Melco, in turn, should grow faster than the market because of its locations on the increasingly desirable Cotai Strip.

Among the caveats: Melco and other gaming companies are subject to Chinese government decisions concerning gambling. That said, analysts expect Melco’s earnings to increase by 20-25% in both 2014 and 2015.

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