3 French Companies 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.
Against what many analysts had expected, there is increasing evidence that France's macroeconomic conditions are improving. For example, since January, the increase in France's PMI new orders has been impressive at 9.1 points (compared to 2.5 points for the Euro-area aggregate). With this in mind, let's take a look at some French companies.
Betting on insurance
I like insurance giant AXA Group (NASDAQOTH: AXAHY.PK) for a simple reason: it looks cheap. Trading at 7.6 times P/E, it sells for 70% its industry's average multiple. More importantly, the discount can not be explained by weak operational performance. The company has been showing strong results, both in sales (up 8.5% year-over-year) and margins. On top of this, AXA is successfully shifting its business mix into product lines that shall be much less sensitive to the upcoming rise in interest rates.
First-quarter results also showed how the company is on track to deliver on all the promises made by management. AXA is reducing leverage and ameliorating solvency. It is following measures that should help reduce risk premiums and hence, boost AXA's P/E multiple.
Moreover, it also has some strong emerging market growth potential. As a matter of fact, according the China Insurance Regulatory Commission, AXA Life Insurance (a joint venture with China's ICBC) ranked twelfth among all insurance companies in terms of premiums collected, strongly up from its thirty-eight position in 2012. I would invest 25% of money into AXA, which pays a 5% cash dividend yield (expected for 2013).
A consumer champion
I love strong consumer goods companies as they have tough to replicate businesses. That's why I think Danone (NASDAQOTH: DANOY.PK) can not be absent from any French portfolio, even though the company's market share trends in continental Europe are somewhat worrisome. That said, I believe the company is losing market share given the tough situation many European countries (above all Spain, Portugal, and Italy) are going through. Consumers simply go for less preferred, but significantly cheaper products. This means that, as soon as the economic situation improves, Danone should recover all the ground that was lost during the crisis.
Despite all the facts mentioned above, and according to the average between Credit Suisse and Rothschild's estimates, Danone should grow its top line 4.5% in 2013 and 6% in 2014. Moreover, I do not think the company's 17% EBITDA margins are in danger, thanks to the high margins Danone is obtaining in emerging markets such as China, where the company is a baby-formula leader. Having underperformed the S&P 500 by 4.5% year-to-date, I think it's time to start looking at Danone. The company trades at 19 times P/E and pays a 2% cash dividend yield. I would assign 35% of my money to Danone.
Oil at a significant discount
Whenever they have good reserve replacement ratios (above 100%) and trade at a discount to peers, Oil companies are a great asset to own when you want income stability. This is the reason why I chose French oil champion Total (NYSE: TOT), which trades at 50% of its group's average P/E multiple.
I expect the company to perform well going forward given that: (1) This year, the company is drilling the highest number of frontier basins among oil majors in locations as diverse as Ivory Coast, Kenya, or Gabon, (2) the on-going cost cutting program, and (3) non-core asset sales of $15 billion to $20 billion to be reached by the end of 2014. Trading at 8 times P/E, paying a 4.8% cash dividend yield, and with a very low net debt to EBITDA ratio, I think Total is a good stock.
Foolish bottom line
Next year, the IMF expects France to grow its GDP by 0.8%. Given the current positive surprise in manufacturing orders (ISM) and the upcoming macroeconomic reforms, I think this figure will be revised upwards. As a result, I am convinced that the time has come to start looking at French companies.
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Federico Zaldua has no position in any stocks mentioned. 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!