Catching the Spanish Flu
Eric is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Following on the heels of our blog post about the possible fate of French American Depositary Receipts, we're turning our attention to the ADRs of Spanish and Portuguese companies. All three countries (plus six other European nations) had their sovereign debt downgraded by Standard & Poor's last week, with Portugal being particularly hard hit -- its paper was downgraded to junk status.
The question this situation usually brings up is whether this presents a good contrarian buy opportunity. Many investors are selling or will sell off their positions, meaning that nearly all of these shares are trading close to their one-year lows. So does this mean it's a good time to snap them up?
In the case of communications stock Telefonica (NYSE: TEF), the answer might just be yes. For years, this former domestic monopoly has successfully operated assets outside of its financially troubled home market of Spain -- namely mobile providers in Latin America. It's also managed to keep profit margins steady and in double digits over the years. EPS is expected to nearly double over the next two fiscal years and the company offers a chunky dividend (currently $1.69), although given its debt situation it's far from certain whether that nice payout can be maintained.
Portugal's flagship phone company is Portugal Telecom (NYSE: PT). Like its Spanish counterpart it's an ex-monopoly trying to broaden its reach throughout the world. Although not as global as Telefonica it has managed to get a toehold in Portuguese-speaking nations such as Brazil and Angola. Compared to TEF it's smaller and less sprawling, but it generally matches the Spanish firm in terms of typical profit margins and beats it handily in debt coverage and dividend yield (currently an enticing 17%, although there are doubts it can sustain such a high level). On a fundamental basis, PT looks a lot more solvent and has significantly more potential than the country it calls home.
Like its telecom cousins, Banco Santander (NYSE: SAN) benefits from having a significant presence outside of liquidity-choked Europe. Partly as a result, the bank is ahead of many of its Euro-rivals in conforming to the European Central Bank's tough new capital requirements. Its cash position is strong, allowing it to pay out a dividend of approximately 50 cents. Net margins are healthy and consistent, and EPS is expected to grow 12% over the next two years.
STD's smaller compatriot Banco Bilbao (NYSE: BBVA) is struggling a bit more, with the market expecting the bank to take a charge of $1.2 billion or so on its U.S. operations. Earnings are, not surprisingly, expected to decline over the next two years.
A little off the beaten via of telecoms and banks is ambitious biotech company Grifols (NASDAQ: GRFS). The company occupies a good niche selling blood plasma and associated products -- in fact, it's one of the top firms in the world doing the business it does. The company still has aspects of the family enterprise it started out as -- a Grifols holds the president and managing director titles -- but has established a firm grip abroad, with operations in California and North Carolina. EPS growth is expected to be strong, although GRFS' relatively sizable debt load is cause for concern.
For the most part, Spain and Portugal don't boast the world-beating companies of some of their fellow European nations (the Netherlands leaps immediately to mind, as does the U.K. and Germany). Once in a while, though, a firm will do well enough to trickle through to a major U.S. exchange. All the stocks detailed above are actively traded on NYSE or Nasdaq. Investors not scared of exposure to companies tainted by the Euro-downgrades, then, might find these Iberian flavors appealing.
The Motley Fool owns shares of Telefonica S.A. (ADR). Eric Volkman 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.