Old Europe Keeps Rolling Along

05/02/2007 12:00 am EST

Focus:

Alexander Young

Equity Market Strategist, S&P Capital IQ

Alec Young, Standard & Poor’s international equity strategist, says European markets still look attractive, and he finds two stocks that trade on US exchanges that he says offer good potential returns. 

“Old Europe,” Donald Rumsfeld scoffed. “A graveyard. A pretty one, but still a graveyard,” was Fyodor Dostoevsky’s take on the Continent.

European bourses have responded to these and similar underwhelming shows of support with gains of around 8.9% (in US dollar terms) in the Standard & Poor’s Europe 350 index this year through mid-April—boldly outperforming other major developed and emerging market indices.

One reason for the strong advance is a weaker US dollar. The greenback has depreciated 3% vs. the euro and 2.6% vs. the pound sterling year-to-date. [So]  the S&P Europe 350’s 8.9% advance in US dollars compares with a 6% local currency gain.

S&P expects the current orderly decline in the dollar vs. the euro and pound to continue, adding to dollar-denominated European equity returns.

Here are [two] European stocks that trade on US exchanges and that carry a four- or five-STARS ranking from S&P equity analysts.

Business intelligence software, which Business Objects (NASDAQ: BOBJ) provides, ranks high on the list of spending priorities for executives, because this class of software enhances the decision-making process.

We believe the company is benefiting from customer upgrades to Business Objects XI, its core product. This offering features a high level of integration with the Microsoft Office suite, which we think has helped Business Objects’ market position. We expect XI to remain a key source of revenues, but we also expect sales cycles to remain long for larger deals, resulting in somewhat unpredictable license revenue growth.

The company has made several acquisitions to expand its product portfolio and move into adjacent markets. As a result, we expect acquisitions to be a significant source of license growth in the future. (The ADRs closed just under $38 Tuesday—Editor.)

Enel (NYSE: EN) is Italy’s leading company in the generation, transmission, distribution, and supply of electricity. In Italy, Enel’s aim is to be the price leader, and internationally it plans to capitalize on its experience by extending its geographic presence.

We like the company’s solid and above-peer annual dividend yield of 5.1%, as well as its relatively strong balance sheet. In late March, Enel joined forces with Acciona SA to make an offer for the Spanish utility Endesa, beating out E.On in a late-round bidding battle. Under the agreement, Acciona would have operational control of Endesa if the acquisition is completed. We are somewhat concerned Enel plans to pay too much for Endesa, considering that it won’t have control. However, we think Enel shares remain attractive for total return.

We expect earnings of $3.45 per ADS for 2007 and $3.60 for 2008. Our target price of $62 is 18x our fiscal 2007 earnings estimate. This premium to US peers is warranted, in our view, because of the company’s superior fundamentals. We think the shares are worth purchasing. (The ADSs traded just below $57 late Tuesday—Editor.)

Related Articles on

Keyword Image
11 Reasons to Buy Microsoft
7 hours ago

For our latest recommendation, we revisit one of the world's most prominent technology companies, Mi...

Keyword Image
A Trio of Top-Tier Biotechs
7 hours ago

We hold three biotech stocks in our growth portfolio — Biogen (BIIB), Bioverativ (BIVV), and R...