by Agnes Lovasz
European stock markets performed less well than their US counterparts in the past year, so valuations at multi-year lows went down. Adventurous investors would find it difficult to resist this value proposition.
The price-earnings ratio (P / E) of European equities to the US "seemed extreme" at the end of last year, said Rory Bateman, head of UK and European equities at London-based Schroders Investment Management in a European outlook for the stock market of 2019.
Europe versus American stock markets, 1974-2018
The gap was broadened when President Donald Trump's tax cuts stimulated US growth and enabled companies to return money to investors, lift US stock prices, Michael Hewson, market analyst at CMC Markets in London, said in an interview. European equities suffered from the weakened economy, increased trade tensions with the US and cooled Chinese growth on top of the uncertainty caused by Britain's upcoming EU exit, he said.
Apart from the geopolitical pressure, the valuation gap is rooted in sectors, with US technology and Europe more focused on financial services, Javier Panizo, portfolio manager and global consumer analyst at Nomura Asset Management in London, said in an interview.
Among the European shares that Nomura approves: London-listed British American Tobacco (LON :), also acting in the US as an ADR (NYSE :), Frankfurt-listed car manufacturer Daimler AG (DE :), also acting in the US as an ADR (OTC :), and Zurich-based employment agency Adecco (SWX: SIX :), which act as a (OTC 🙂 in the US without a prescription.
1. British American Tobacco
What makes British American Tobacco a good choice now? It is trading at less than 10 times the expected profit for 2019, Panizo says. Nomura expects the tobacco company to generate a free cash flow of £ 7.3 billion ($ 9.7 billion) this year, enough to pay the rich dividend that earned the company 4%, while leaving significant cash to pay off the debt To unload. The current return on shares is 6.44% for UK shares, 8.01% for US ADR.
Company shares, which make Dunhill and Lucky Strike cigarettes, have lost nearly half their value after reaching a record high in May 2017. The current price is more than 50% below the future cash flow value of £ 66.94 per share, according to the website of the Simply Wall St financial analysis, which calculated this on the basis of estimated future free cash flow for the coming 10 years.
The company recorded sales of £ 25.76 billion (USD $ 33.9B) for 2018, adjusted for currency fluctuations and the impact of the Reynolds American (NYSE 🙂 acquisition in 2017. That is an increase of 3, 5%, driven by market share gains and price increases. Earnings per share rose, on the same basis, by 11.8% to 315.5 pence, the company said on February 28.
BATS shares were under pressure because the US Food and Drug Administration is considering banning menthol-flavored cigarettes that are thought to be a gateway for new smokers, according to London-based investment firm Hargreaves Lansdowne. That would be "a big blow" for the British American because of his dominant position in menthol in the US after the Reynolds acquisition, Hargreaves said.
Additional headwind arose last week when the company said it would charge £ 436 million (USD $ 573 million) against 2019 revenue after losing an appeal in a class action lawsuit against Canadian smokers against the Imperial unit Tobacco Canada and two of its rivals. The Quebec Court of Appeal confirmed earlier this month a 2015 ruling that the three companies must pay CAD15.6 billion ($ 11.6 billion) in damages to the smokers
Nevertheless, Panizo of Nomura said he was not deterred by these developments. The accounting adjustment made after the ruling by the Canadian Court of Appeal did not lead to cash outlay, and the most unfavorable possible outcome, which closes the Canadian unit, would have a negative impact of 4% on earnings, he said.
The regulatory risk "has probably reached a tipping point" with the resignation of FDA Commissioner Scott Gottlieb, the main proponent of strong anti-tobacco legislation, said Panizo, adding that "the future in tobacco is clearly a new range" of new generation products such as vape and heat. "BAT is investing more and more in new products, which should lead to positive results in the medium term.
2. Daimler AG
Nomura asset managers also love Daimler, owner of the Mercedes-Benz brand. It is not an intuitive choice given the multitude of challenges that European car manufacturers are facing this year, such as sales in Europe and China, the potential impact of the stalled resolution on the US-China trade dispute and the threat of increased US car and vehicle rates. # 39; s from Europe after US President Donald Trump instructed the Department of Commerce to investigate whether imports of cars & # 39; s pose a threat to national security
Stricter regulations on diesel emissions that came into force last year will also affect the sector. Competition from electric car manufacturer Tesla (NASDAQ 🙂 and ride-sharing services is also putting pressure on car manufacturers to accelerate the development of electric and hybrid vehicles, which requires significant investment.
According to Panzio, Daimler is "a higher quality company within a cheap and from the favor sector." The stock market is trading at an attractive profit of 6.5 times 2019. And because of Mercedes-Benz, the company has better brand perception than competitors.
It has also committed itself to significant spending on electric cars and new emissions technology, Panzio added. The car manufacturer plans to launch ten fully electric cars in the next five years.
While earnings per share fell from 29% to 6.78 euros (USD $ 7.66) in 2018 compared to the previous year, even with a sales increase, according to Daimler's financial statement on February 15, Nomura expects that profit will grow this year and in 2020. .
3. Adecco Group
Nomura & # 39; s third choice is Adecco, & # 39; the world's largest employment agency, whose shares trade at 10.6 times the expected profit in 2019, implying that market discounts have a "strong deterioration in EU labor market, possibly leading to a recession, "Panizo said.
While Europe is slowing down, there is no complete recession imminent. Analysts questioned by Consensus Economics expect the eurozone economy to grow just below 1.6%, which would be the second consecutive year of a slowdown, compared to the expected growth of 1.9% last year and a growth of 2.4% in 2017, the Financial Times reported in January.
The Swiss company recorded an unexpected net loss of 112 million euros (USD 126.5 million) for the fourth quarter of 2018 after impairment of goodwill on its German operations due to a change in temporary staffing rules, production reductions the German auto sector, and the German economic slowdown, said Alain Dehaze, the chief executive during a Bloomberg Television interview on February 28.
Even though Europe is slowing down, the company sees solid growth in the United States and Asia, Dehaze said.
According to Thompson Reuters data, the average analyst recommendation for Adecco is "Hold". However, analysts have traditionally been concerned about a structural margin decline within this segment, and the chief financial officer of Adecco acknowledged last month that it will be more difficult. to improve margins in a challenging growth environment, Reuters reported, but Adecco recorded a fourth quarter of the gross margin that exceeded analyst expectations, which is "encouraging," Panizo said.
