Is it Time to Invest 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.
The European crisis has been long and painful, and it´s still too early to tell if the Eurozone is leaving the recession behind. However, recent economic data is quite auspicating, so maybe it’s time to invest in European companies while they are still cheap.
European Green Shoots
European stocks were rising on Wednesday as the Markit Flash Eurozone PMI index reveled encouraging data about the health of the Eurozone economy. The indicator increased for the fourth successive month, up from 48.7 in June to 50.4.
Levels above 50 show economic expansion, and the indicator has a strong correlation with GDP, so things seem to be turning for the better in the old continent. Some economists believe the data is signaling that the Eurozone may finally pull out of the recession in the third quarter.
There is no guarantee of a sustainable and strong recovery, and it’s important to watch for financial and political problems that could spoil these incipient green shoots. But from a long term point of view, Eurozone companies look well positioned in terms of upside potential versus downside risks.
Banks have been at the center of the global financial crisis during 2008 and 2009, when it comes to European financial institutions, they were again seriously affected by the sovereign debt crisis in the region. Eurozone banks are hard to analyze due to their complex balance sheets and exposure to all kinds of risky assets, but they also offer some very compelling valuations.
Deutsche Bank (NYSE: DB) has proven its resiliency over the last years, as it went through the crisis without requiring any government bailout. The bank is the undisputed leader in Germany, arguably the strongest country in the Eurozone, and it has a wide global reach in areas like corporate banking and transaction banking among others.
The company raised EUR 2.8 billion in April to strengthen its balance sheet, being in better shape than its competitors, Deutsche Bank is in a position of advantage to gain market share as the economy improves. This German financial powerhouse is still offering an attractive entry point trading at a price to book value ratio below 0.7.
Banco Santander (NYSE: SAN) is specialized in retail banking, which represents nearly 75% of its operations. The company has expanded beyond its home country Spain to become a global financial institution with over $1.5 trillion in assets and more than 14,000 branches worldwide. More than 50% of the bank´s profits come from Latin America, where Brazil represents a big 26% of overall profit. The company also has sizable exposure to the U.S. and the UK, which generate 12% of profits each.
This geographical diversification has been a key source of growth opportunities for Banco Santander, and it has also helped avoid too much exposure to Spain and other troubled Eurozone countries. At a price to book value ratio of 0.8, it’s not too late to buy this bank and capitalize the European recovery.
The auto industry is known for its cyclicality, especially when it comes to the kind of high end vehicles manufactured by BMW (NASDAQOTH: BAMXF). However, you wouldn´t have guessed that by looking at the company´s financials, BMW has sustained healthy performance though the year as regions like the U.S. and emerging markets have compensated for falling car sales in Europe.
In fact, the company has reported its best sales ever for the first half of the year with 954,521 vehicles sold until June, a 6% increases versus the first semester of 2012. Quality, brand differentiation and global reach keep BMW running at full speed in spite of weak demand from Europe, and the company should do even better if the region leaves its economic problems behind. At a P/E ratio below 9, this luxury car maker is selling at a discounted valuation.
If things are going to be more stable in Europe, that would benefit not only stocks in that region, but also global risky assets including energy prices. That’s a double win for French integrated energy giant Total (NYSE: TOT)
Total has a production capacity of more than 2.3 million of barrels of oil equivalent a day, of which approximately 52% is oil. The company is also one of the 10 largest chemicals companies in the world and operates a global refinery footprint with 1.9 million barrels of oil per day capacity. This major energy company also pays a big fat dividend yield above 4%, which provides plenty of upside potential from a valuation point of view.
It may be too early to call the end of the recession in the Eurozone, but things are starting to look better. Besides, high quality companies manage to grow and thrive through good and bad times, so this may be a good time to invest in European stocks while they are still offering compelling valuations.
With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!
Andrés Cardenal owns shares of BMW. The Motley Fool recommends Total SA. (ADR). 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!