Is It Time to Trust Europe Again?
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It maybe too early to call it just yet but initial indications seem to suggest that the euro zone is actually on the road to recovery. I make this statement after a flood of good information from the euro zone over the past few days. The Markit 'flash' estimate of its composite purchasing managers index for July rose to 50.4 from 48.9 in June - a reading over 50 signals expansion. This reading also highlights the fact that the euro zone is to some extent immune from the slowdown in China, where similar data showed manufacturing activity dropped to an 11-month low.
There is also good news coming out of Ireland, where the collapsing property market has shown signs of stabilizing and, for the first time since the property crash, property prices throughout the country have started to tick higher.
Additionally, the UK economy grew 0.6% for the second quarter and the Spanish economy only shrank 0.1%, lower than the 0.5% decline in the first quarter. Moreover, Spanish exports rose 7.3% and unemployment fell from 27.2% in the first quarter to 26.3% at the end of the second quarter, still high but signs of improvement are showing through. Elsewhere, tourism revenue has started to expand in Greece after a year of contraction throughout 2012.
So, could it be time to take on some risk in Europe.
Investors are slowly returning to the Irish economy and a good play for this trend would be bailed-out Bank of Ireland (ADR) (NYSE: IRE). Indeed, it would appear as if investors are already showing their support, as the bank recently issued $650 million of unsecured three-year debt for a rate of 2.7%, almost half the rate that it had to pay after its state bailout. Moreover, this rate is less than some US banks are being asked to pay.
The banks balance sheet is also showing signs of strength. The loan-to-deposit ratio fell below 130% at the end of 2012, down from 175% at the end of 2010 and Tier one capital ratio stands at 14%, which is higher than that of banking giant Wells Fargo, which has a Tier one ratio of 12.1%. In addition, during 2012 the banks net interest margin grew by 14 bps to 1.3% in a general low interest rate environment.
However, while Bank of Ireland is becoming stronger, it would appear that this is at the expense of its customers, who are leaving in droves to find better interest rates as the bank tries to drag itself back to health. Still, as one of the country's biggest banks this is unlikely to stall the banks recovery.
France is not showing such positive signs of economic recovery but it does offer a good contrarian play. Plagued by accusations of corporate misconduct, France Telecom, recently renamed Orange (ADR) (NYSE: ORAN), is a risky play but the company has its strengths. Free cash flow was euro 1.1 billion for the first half of the year, easily covering the company's euro 788 million dividend payment of 3.7%. Book value stands at $12.05 per share, so the company's stock offers value. Revenue is struggling to grow but the company's management is being proactive and is looking to cut costs.
Still, the company will only be able to stage a turnaround if the economic situation in Europe improves and a brutal price war is currently underway. That said, Orange has operations throughout Europe, including the UK, and the growth of mobile 4G usage will hold the company together until Europe starts to grow again.
Trading at a discount to book value and with a higher-than-average dividend yield, Orange could be a good risk to take.
Of course the strongest economy in the euro zone is Germany and there are a few opportunities in the market that offer some real value.
One such company is Wacker Neuson (NASDAQOTH: WKRCF), a producer of construction and industrial equipment. Although now may not be the perfect time to buy the stock due to the slowdown in European construction activity, the company does offer some real value.
Book value stands at $17.20 per share and current assets of euro 612 million more than cover total liabilities of euro 482 million. In addition, the company's current ratio stands at just under 3x. Wacker offers investors a 2.9% dividend yield so a buy and hold strategy will give investors an above-market yield.
Wacker had a poor first quarter with revenue falling 6.2%, however, management remains confident and have stated that they expect sales to pick up through the rest of the year and full-year revenue should come in at euro 1.2 billion, up 10% from euro 1.1 billion reported for 2012. Management also expects the EBITDA margin to expand beyond the level of 13% seen in 2012.
As Caterpillar is a play on the global economic recovery, Wacker is a solid value play on the European recovery.
All in all, Europe is showing some signs of recovery and these three companies have the potential for good profits when the turnaround gets fully underway. Moreover, each company has a solid, individual reason for investment that makes it independent of the wider market. The Bank of Ireland offers a turnaround play on the Irish economic recovery. Orange offers a play on the beaten-down but relatively defensive telecoms market; and Wacker offers a value play in a disliked sector.
Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Orange (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!