Euro Zone Maneuvers Seeking Stability
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Last Thursday, equity markets in the United States rallied 2% on Mario Draghi's commitment to unlimited purchases of bonds to lower borrowing costs for the region’s struggling economies. This news was also cheered by the world’s markets as evidence that the ECB will be able to produce much desired stability in the euro zone and its currency, the euro. However, the announcement conflicts with the position of Germany’s Bundesbank, which has Euroland’s deepest pockets. Bundesbank president Jens Weidmann voted against the program and two events set to occur during the month of September could derail investor’s growing enthusiasm.
This week, the German Constitutional Court is set to rule on the European Stability Mechanism bailout fund. If the court rejects Germany’s support for the fund, as some see as the likely outcome, fresh worries about the uncertainty of the euro zone and its currency could unnerve investors. Following that potential disruption to the market will be Greece’s deadline by month's end for adopting new budgetary measures. Failure by Greece to meet expectations with its budget, which has been all too common since the financial collapse, could rock the markets by reintroducing the ugly specter of Greece’s distress and possible exit from the euro. So, while the ECB announcement of unlimited bond buying was welcome news as far as it went, investors must be wary that the path forward in September is fraught with potential land mines that could reverse any gains seen this week.
Companies selling into the euro zone that will feel the influence of the European maneuvers include Ball Corporation (NYSE: BLL), a worldwide supplier in the beverage can market. This market is dominated by an oligopoly that also includes Crown Holdings Inc. (NYSE: CCK) and Rexam Plc. Nearly all of the European supply of beverage cans is sold by one of these three companies. Another company selling heavily into the European market is McCormick & Co. (NYSE: MKC), the leading global manufacturer, marketer, and distributor of spices and other flavorings, which gets about 20% of its revenue from the region.
The market reaction to the ECB announcement by these individual companies’ shares reflects, at least in part, their European exposure. For those looking to invest in Europe through any of these names, forward PE and price to earnings to growth (PEG) multiples are useful indicators of their relative potential. Ball is expected to grow earnings at 9.2% and trades at a PE of 12.9x and PEG of 1.4x. This PEG exceeds that of Crown at 1.2x and is comparable to Rexam at 1.4x. Crown and Rexam trade at PE's of 11.0x and 17.7x, respectively, while their growth rates are estimated at 9.2% and 12.9%, respectively. Based on these metrics alone, Crown is currently the most attractive of the beverage can oligopoly. McCormick is projected to grow earnings by 9.8% going forward and investors are willing to pay for this growth as demonstrated by its PE of 18.8x and PEG of 1.9x, which is at the high end of my preferred 1x-2x range.
Although no one can say definitively what Mario Draghi and the other euro zone players will do as they continue the struggle to revive Europe, the process will be rocky and investors should be wary of latching onto any news that appears to be “proof” of success on the continent. This brief PEG analysis of these companies participating in the European market is merely one aspect of the due diligence investors should conduct to gain sufficient knowledge of the investment attractiveness of each of the companies.
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