The Top European Ideas for Your Portfolio
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Europe is still going through a tough recession. While Germany stays strong thanks to its unparalleled industrial power, countries such as Spain and Italy remain under pressure. That said, investing has a lot to do with expectations. As professor Michael Mauboussin (who is the head of global financial strategies at Credit Suisse) used to say in his classes, investment success equals reality minus expectations. And expectations for Europe are, indeed, remarkably low. Let's see three European companies that might help your portfolio going forward.
A top global sporting company growing earnings at full speed
One airline to look at
Cutting costs could significantly improve earnings
BT Group (NYSE: BT) is still one of the least efficient incumbent telecom companies in Europe, and the market seems to be under-appreciating the significant cost-cutting opportunities the company could benefit from. On the other hand, BT is growing fast in the high-margin UK high-speed broadband market, which is allowing the company ameliorate its Revenue Per Line (RPL). As a matter of fact, fiber adds accelerated again during the first quarter of the year to 211,000 retail fiber subscribers, versus 200,000 during the fourth quarter of 2012.
Still losing sales at a decreasing, although still very high, 5% year-over-year rate and trading at 12 times 2013 earnings and 5.3 times EV/EBITDA, I think the company is a bet on the recovery of the European telecom market. Moreover, the company has significant margin upside through cost cutting and is one of the very few European telecom companies with a reasonable net debt ratio (1.3 times EBITDA) . The company is expected to pay a 3.1% cash dividend yield this year. Meanwhile, it is generating an 8% free-cash-flow yield.
The Foolish conclusion
The three companies above provide substantial up-side but, at the same times, they also come with great risk. Europe is still in trouble, and European asset prices shall suffer in the event of bad news, such as the recent political trouble in Portugal. Adidas is the only company in this group of three that should stay unmoved by political uncertainties in the Old World. That said, BT Group and Ryanair provide the most up-side if the situation in Europe clears up.
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Federico Zaldua has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!