Shopping For Bargains in Europe
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Is the worse part over for Europe and the global economy?
Well, that´s really hard to tell. We have seen many failed solution attempts to the Eurozone financial crisis over the last years, and there are some serious concerns about the impact the budgets cuts will have on economic growth during 2012.
Even if Greece and other countries manage to implement all the committed austerity measures, economic growth and tax income are hard to predict in a recessionary environment. You can cut expenses all you want, but that doesn´t mean you are going to avoid the effects of those cuts on economic activity and tax revenues.
The Eurozone countries are going to face many challenges in the middle term, until economic growth is restored and countries recover a sustainable fiscal trajectory we cannot have too much faith in the European economy. It will take some months at least to evaluate the situation in Europe with more evidence, but waiting until things get clearly better may not be the best alternative for long term investors looking for bargains in the old continent.
Bull markets climb a wall of worry, and waiting for clear skies to invest in Europe probably means having to pay much higher prices than those available right now. Also, the economic context may remain uncertain, but many companies have solid trajectories and strong growth prospects, so they can handle the situation and keep growing in the long term despite all the economic problems.
Consider Siemens (NYSE: SI) for example, this electrical engineering company is based in Germany, but has truly global operations. Siemens has been restructuring its business lately, and that has negatively affected sales. But profit margins and earnings are increasing, and the same goes for the company´s dividend. The industry is cyclical, but long term prospects look interesting considering infrastructure demand in emerging markets.
Siemens looks quite cheap at a P/E ratio of 11.2 and paying a dividend yield of 2.9%. If the company can keep raising dividends that should put a floor to the stock price and reduce volatility. Siemens has been involved in some bribery scandals in the past, and that is probably affecting the company´s valuation, but that situation seems to be mostly under control and the stock has plenty of upside potential if Siemens can deliver solid growth rates.
There are some very juicy dividend yields in European telecom stocks. This may not be a high growth industry, competition is quite hard and it pressures profit margins, but demand tends to be quite stable in the telecom sector. These companies have a considerable size and many financial resources so the dividends look sustainable in the middle term.
Telefonica S.A. (NYSE: TEF) provides telecommunications services in Spain and other European countries, but the company also has a very strong presence in Latin America, which provides much better profitability and growth opportunities. This company pays a dividend yield around 9.8%, even if there is a dividend cut in the horizon, which doesn´t seem to be the case right now, Telefonica looks cheap enough to compensate for the risks.
Another European telecom stock that provides a very attractive dividend yield is France Telecom which trades at a 9.2% dividend yield at current prices. Growth has been unexciting for this company over the last years, but profit margins are stable and free cash flow is pretty solid too, so the dividend doesn´t look too risky.
The pharmaceutical sector is another area where there are some interesting opportunities at convenient prices. This industry has been affected by several factors like patent expirations and regulatory uncertainties all over the world, but there are many opportunities in solid companies trading at attractive valuations.
Sanofi (NYSE: SNY) is facing some important patent expirations in the near future, but the company is developing new products and reporting solid results. Sanofi has also have been regularly increasing dividends since 2004. The company is in good financial shape and valuation looks cheap with a dividend yield of 3.6% and a forward P/E ratio bellow 6.2.
Total (NYSE: TOT) can be considered a cheap alternative to other integrated oil and gas companies. Based in France, Total has been punished for its European exposure, but the company is still showing healthy growth: sales increased a 17% in the last quarter versus the year before.
Total is investing for growth opportunities in emerging markets and expanding its exploration budget to increase production over the long term. With a dividend yield of 4.7% and trading at a P/E ratio below 8 this seems like a conveniently valued energy play.
Time will tell if the worst is over for Europe or investors need to go through more volatility in these companies. However, prices are attractive for some stocks with solid fundamentals; so long term investors could consider doing some bargain hunting in European stocks.
Motley Fool newsletter services recommend France Telecom (ADR) and Total SA. (ADR). The Motley Fool owns shares of Telefonica S.A. (ADR). acardenal has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.