Bargain Hunting in France
Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
A lot of people don't have the stomach for investing in many emerging markets.
That is because people feel uncomfortable investing in countries rampant with corruption, or in countries where more than half of the population is illiterate, or worse yet, in companies where the Government is the majority shareholder.
Or at least that is the feedback that I received after I wrote an article, Bargain Hunting in Brazil.
After reflecting on that article, I tentatively concluded that there are probably a lot of companies in developed countries, such as France, that currently offer tremendous value.
Although nobody likes France’s labor laws and some criticize its citizens’ work ethic, France is the world’s fifth-largest and Europe’s second-largest economy by nominal GDP.
And France is the wealthiest nation in Europe and one of the wealthiest nations in the world in terms of aggregate household wealth.
That is why I decided to focus on France -- after all, France must be doing something right!
What Factors Should You Consider?
When investing in other countries, there are several factors that you should consider.
A major consideration is the economic environment, particularly four key aspects of society: infrastructure, regulatory institutions, education, and culture (the general way a country and its leaders relate to the world).
Fortunately France’s leadership is “committed to a capitalism in which they maintain social equity by means of laws, tax policies, and social spending that reduce income disparity and the impact of free markets on public health and welfare.”
And France has implemented austerity measures to attempt to bring the budget deficit under the 3% euro-zone ceiling by 2013 (even though they will fall short) and to highlight France's commitment to fiscal discipline at a time of intense financial market scrutiny of euro-zone debt.
Plus France’s leadership is committed to “pro-growth policies” (even though France's economy is stagnant and there are few catalysts for growth).
Another closely related consideration is the stability of the country. A major driver of stability is the unemployment rate, which has stabilized at around 9% in France.
Overall, despite stagnant growth and fiscal challenges, France’s borrowing costs declined during the second half of 2012 to euro-era lows.
That means that the cost of doing business in France is low.
After considering these factors and a few others, France doesn’t look all that bad!
What Companies Should You Consider?
All of these companies are trading well off their 52-week highs, 3 of these companies currently have dividend yields of more than 5%, 1 of these companies just hit a new 52-week low, and 1 of these companies is up by approximately 15% since I wrote an article about it a few weeks ago!
An Oil and Gas Company
Total engages in all aspects of the petroleum industry, including Upstream operations (oil and gas exploration, development and production, liquefied natural gas) and Downstream operations (refining, marketing and the trading and shipping of crude oil and petroleum products). There is very little not to like about Total. Total is trading at a P/E ratio of around 7, pays a dividend of more than $3/share (roughly a 6% yield), has a price-to-cash flow-ratio of less than 5 (implying a 20% annual cash return), and has a healthy exposure to emerging markets around the world. And gas prices are nearing their all-time highs! There are only a few negatives that are commonly cited by analysts: "management risk" (that just means that they are non-US managers), the European crisis, and the gas leak in Total’s Elgin Head Well Platform in the North Sea. All factors considered, though, at below $50/share Total is a bargain!
A Telecom Company
France Telecom is a European mobile operator, Internet access provider, and telecommunications services provider for multinational businesses under the Orange brand. Unlike Total, France Telecom is more controversial. Many analysts, for example, will cite concerns regarding the competitive environment, or margin compression, or concerns about value-added taxes. Sure, France Telecom is a company that has some legitimate issues. But this company is trading at a P/E ratio of around 7, pays a very solid dividend (which it has guaranteed), has a healthy balance sheet, has exposure to emerging markets that could catalyze growth, has a strong brand, and is strategically partnering with companies. All in all, this stock has been badly beaten down (it just hit a new 52-week low) and has a compelling valuation!
An Environmental Management Company
Veolia Environment is a global provider of environmental management services, which include water and wastewater services, environmental services, energy services and transportation services. Veolia’s operations are conducted through four divisions, each specializing in a single business sector: water, environmental services, energy services and transportation. On the positive side, Veolia is one of the largest companies in France, has a dividend yield of around 7%, has a book value of approximately $18.50 vs. a stock price of slightly over $12 per share, and has delivered sales in excess of $30 billion each of the past 10 years. On the other hand, Veolia has a very low profit margin of less than 1%, has to deal with a lot of capricious rules and regulations, and has erratic earnings per share. On balance, however, this company has significant upside potential and is worthy of consideration.
A Networking Company
Alcatel-Lucent provides mobile and broadband networking services. Its products and services include access management services, access multiplexer, Carrier Ethernet, IP/MPLS & ATM networks & consulting services. A few years ago, this company was hot. That said, it is amazing how fast things change. After all, this company was recently on life support, which I wrote about in the article Lucent: Awakening From the Dead. If the company can either effectively restructure or receive a substantial amount of new business from China Mobile and demonstrate the ability to consistently earn a profit, then this company’s share price could easily double or triple.
3 Factors to Consider
- Although it is far from perfect, France provides businesses with a more favorable economic environment than any emerging market does.
- Total’s valuation compares favorably with that of any US Oil and Gas company (Chevron, Exxon, ConocoPhillips), France Telecom with that of any US Telecom company (Verizon, AT&T, Sprint), and Veolia with that of any US Waste Management company (Waste Management).
- Total, France Telecom, and Veolia all pay handsome dividends. Alcatel-Lucent does not pay a dividend, but it has the potential to be a two or three bagger.
My Foolish Take
France and Germany have two of the strongest economies not only in Europe, but also the world. Overall, it appears as though many European companies that trade on the NYSE have been unfairly lumped together and unfairly penalized for the ongoing “European Crisis.” All of these companies have fairly attractive valuations. Of these companies, I feel that Total and France Telecom are strong buys while Veolia and Alcatel-Lucent are more speculative plays.
RyanPeckyno has positions in all of the stocks mentioned (Total, France Telecom, Veolia Environment, and Alcatel-Lucent). The Motley Fool recommends France Telecom (ADR), Total SA. (ADR), and Veolia Environnement (ADR). The Motley Fool owns shares of France Telecom (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!