Taking Advantage of Europe’s Pain

02/06/2012 12:22 pm EST


Michael Tian

Senior Equity Analyst and Equities Strategist, Morningstar Opportunistic Investor

The bear market on the continent discounted at least two tempting bargains, says Morningstar equities strategist Michael Tian in this exclusive interview.

Michael, Europe has been on everyone’s radar because of that single European currency and the problems of Greece, so you’ve seen quite a sell-off there. Are there any opportunities?

I think there are. You have to be very careful, though, because Europe does have very deep structural problems.

I think somebody is going to have to take a big bath somewhere. Each country and each company within those countries is going to be treated very differently so there is going go be winners and losers.

The sell-off has been pretty broad; it’s hit everywhere, pretty much across the board, equal ferocity. I think it has uncovered some interesting opportunities that you can just kind of tiptoe yourself into at this point.

Such as?

I guess my No. 1 company at this point is a company based in Sweden called Autoliv (ALV). It’s trading for under ten times earnings right now.

Autoliv is the world’s largest maker of automotive safety equipment with a 25% market share—it’s a very, very consolidated sector. They actually, because they have the most innovative company in the space, and has a huge R&D budget, it’s gained market share consistently for probably ten or 15 years.

As auto sales shift to developing markets, that’s a big tailwind in their direction as well, because developing markets’ safety standards are so much lower. In India, for example, the amount of safety equipment per car is 20% of what it is in North America. So as those standards catch up, that is a lot of tailwind in their top line and bottom line.

Anything else on your radar, Michael?

Another company I like is ICON Pharmaceuticals (ICLR). It’s actually based in Ireland. I think it’s gotten a little bit of a stigmatized buy down, but it’s really a global company.

They do a lot of business in Europe, but also in North America and Asia as well. They are one of the larger contract-research organizations (CROs) in the world, meaning they help biotechs and pharmas run and conduct clinical trials so they can get new drugs approved…so obviously a pretty important part of our modern society there.

Over the past ten or 15 years, the big trend has been the pharmaceutical industry has been outsourcing this function to independent specialists like ICON. We expect that to continue going forward.

At the same time, ICON and larger CROs are gaining a lot of market share by squeezing out the smaller CROs. For example, ICON just signed a huge agreement with Pfizer (PFE), which has been one of the big holdouts in terms of outsourcing its clinical development.

Pfizer went from having 17 different providers for a small part of its clinical spend to having two providers for a larger part of its clinical spend. That relationship is going to grow going forward.

Do you personally own or professionally own any of these stocks?

I do, I own both of them. I think they have a bright future ahead of them.

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