Years after the financial crisis swept
across the world, Europe is ripe for investors. After 18 months of economic
contraction, the euro zone, the 18 nations that officially adopted the euro as
their common currency, finally emerged from recession last year.
Although Kiplinger’s expects another winning year for
U.S. stocks, there’s a reasonable chance that European shares will do better
(see “Outlook 2014” and “Investing Abroad: A Mixed Bag,” Jan.). The Federal
Reserve has already started to scale back its bond-buying program, which has kept
long-term interest rates low and which many analysts say has played a key role
in levitating share prices in the U.S. The European Central Bank (ECB), which
oversees a number of economies that are weaker than the U.S.’s, is likely to
maintain more- stimulative policies for a longer time, and that
will be a key driver of European share prices, says Alec Young, a global equity
strategist at S&P Capital IQ.
European stocks are also cheaper than their
U.S. counterparts. The average European stock trades at 13 times estimated 2014
earnings, compared with a price-earnings ratio of 15 for U.S. stocks. (All
prices are as of December 31.)
Despite improving economic data, Europe is
hardly booming. Kiplinger’s expects gross domestic product in the euro zone
to grow just 1% in 2014. The unemployment rate in Spain is a staggering 26%.
Greece, with outstanding debt at 160% of its GDP, will almost certainly not be
able to repay all it owes. Political turmoil in Italy may undermine that
country’s fragile economy. But the overall recovery in Europe, though modest,
is real, and lagging nations are expected to make up ground over the next few
years.
Below we list five European stocks that should
benefit from the blossoming recovery. Symbols and share prices are for American
depositary receipts (ADRs). If you’d prefer to invest in Europe through a fund,
you’ll find our best bets in the box on page 34.
Financials recover. The 2008 crisis hit the European
financial sector hard. Many banks held sizable amounts of government debt from
the troubled euro zone countries. Banks failed, and bailouts were needed. But
the financial system in Europe has come a long way over the past few years.
Government bond yields have stabilized, the European Union continues to enact banking
reforms, and the ECB is holding down interest rates to promote growth. Two
banks that should prosper are LLOYDS BANKING GROUP (SYMBOL LYG)and BANCO
SANTANDER (SAN).
Lloyds, one of the most venerable banking names
in the United Kingdom, might have fared better during the global meltdown had
it not bought HBOS, a troubled British firm with interests in banking and
insurance. The deal was announced in September 2008, just two days after Lehman
Brothers filed for bankruptcy, a key event in accelerating the financial
crisis. Lloyds’s ADRs, which traded at $48 in early 2007 and $19 when the deal
was announced, plunged to less than $3 after the takeover was completed in
January 2009 and ultimately bottomed at $1.34 in November 2011. After the
British government bailed out Lloyds with several cash infusions, the company
did some damage control of its own. It closed the worst of HBOS’s
businesses and wrote down billions of dollars in bad loans.
Lloyds appears to be on the mend. Its business
is concentrated in the U.K., where the economy and housing market are
strengthening. (The United Kingdom is a member of the European Union but does
not use the euro as its currency.) Lloyds, which lost money in 2012, was
expected to have earned 36 cents per ADR in 2013, and analysts see profits of
42 cents per ADR in 2014. At $5.32, Lloyds sells for 13 times estimated 2014
earnings, in line with the average P/E for the financial stocks in Standard
& Poor’s 500-stock index.
Banco Santander, the largest bank in Spain,
made it through the global recession relatively unscathed despite the
significant, and lingering, damage to the Spanish economy. It helped that the
156-year-old bank diversified outside of Europe decades ago and has become a
major institution in global banking. Latin America—particularly Brazil and
Mexico—now accounts for 50% of Santander’s profits. Europe accounts for about
one-third of the bank’s profits, with half of that coming from Spain. Santander
posted strong results in the third quarter of 2013, and analysts see earnings growing
by 20% in 2014, to 67 cents per ADR.
The ADRs, at $9.07, are nearly 60% below where
they stood in October 2007. At 14 times estimated 2014 earnings, Santander is
reasonably priced.
Consumer comeback. Better European economies should
encourage the Continent’s inhabitants to spend more on the finer things. We
like two companies that should benefit from Europe’s rising consumer spending.
ELECTROLUX (ELUXY), one of the largest household-appliance
makers in the world, remained profitable through the financial crisis. More
recently, the Swedish company, which gets nearly one-third of its earnings from
North America, has been benefiting from the U.S. housing recovery. Business in
Europe, which contributes about20% of profits, is expected to grow over the
next few years. Electrolux is known for its namesake vacuum cleaners, washers
and dryers, as well as its Frigidaire refrigerators.
At $53, Electrolux trades at 14 times estimated
2014 earnings, in line with the P/E of rival Whirlpool (WHR). Andre Kukhnin, an
analyst with Credit Suisse, rates the stock a “buy” and sees it rising 13% over
the next year. (His price target is based on Electrolux’s Swedish-listed
shares, which are priced in kronor.)
Spanish fashion retailer INDITEX (IDEXY)operates
more than 6,000 stores worldwide. Globetrotters can find its flagship
chain, Zara, in almost every major city in the world. The core market for
Inditex is Europe, which accounts for two-thirds of sales, but the company
(formally called Industria de Diseño Textil) is also expanding into emerging
markets. Highly regarded for its expertise in “fast fashion”—the ability to
rapidly design, produce and distribute trendy-yet-affordable clothing—Inditex
will surely profit as Europe picks up steam.
Raymond James analyst Cedric Lecasble believes
the company will outpace the broad European market over the next 12 months. At
$33, the ADRs sell for 26 times estimated year ahead earnings. That is in line with
Inditex’s biggest competitor, Sweden based Hennes & Mauritz (HNNMY), otherwise
known as H&M.
Impressive income. As U.S. investors know, phone
companies are go-to stocks for dividends. The same is true in Europe. In
particular, the ADRs of DEUTSCHE TELEKOM (DTEGY), the Continent’s largest
telecommunication services provider, yield a juicy 5.4%, more
than both AT&T (T) and Verizon Communications (VZ).
Deutsche Telekom is a company undergoing
change. It has a new CEO, and it has been negotiating to sell its T-Mobile USA
subsidiary (it owns 74% of the company). Sale of the unit would probably net
the German company about $15 billion before taxes and allow it to focus on its
European operations, which currently account for 80% of earnings.
With revenues having climbed 6% in the third
quarter of 2013, Deutsche Telekom is showing signs that it is benefiting from
Europe’s recovery. The ADRs, at $17, aren’t cheap for a telecom stock, trading
for 18 times estimated 2014 profits. But analysts see Deutsche Telekom’s
earnings jumping 26% this year, so the above average price-earnings ratio seems defensible.
Plus, even if the stock does nothing over the coming year, you’ll collect that
handsome dividend
ANJELICA TAN
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