Italian stocks

Morgan Stanley (NYSE:MS)’s Strategy Data Gallery for its European Equity Strategy, is out and there is some interesting data about Italy.

While Greece and Spain currently occupy center-stage in the seemingly insoluble European debt crisis, Italy is always mentioned as one more crisis point. The media usually obsesses over the raise in bond yields, however, little attention is paid to equity markets. Italian stocks have plummeted over the past several years. According to Morgan Stanley (NYSE:MS) research, Italian stocks are down 20% over the past year. Since the beginning of the downturn in 2007, iShares MSCI Italy Index (NYSE:EWI), which tracks the largest stocks in the Italian market, is down close to 73%.

Italian Stock market one year performance

European stocks have crashed, yet a look at the data shows that its valuations may have fallen disproportionately compared to its peers in the crisis.

A look at another chart showing the countries’ relative valuations and ownership trends compared to the Historical norm places Italy, along with Spain, squarely in the “Cheap and Underowned” quadrant. Note that Germany, Holland, Belgium, Denmark and Ireland are found in the diagonally opposite “Expensive and Overowned” quadrant.

A look at the valuation parameters of Italy for 2012 (e) in relation to their discount compared to Europe is interesting:

Italy stock market valuation metrics

2012 estimates are as follows:

· Price to Earnings 8X– 25% (discount)
· Price to Cash Earnings 3.4X–31% (discount)
· Price to Book value – 0.65-50% (discount)
· Price to Sales –0.50 or a 35% (discount)

EV/EBITDA is 4.0, or a 28% discount.

Not only are Italian stocks super cheap on a compartive basis, but on a stand alone basis as well. Individual stocks are even cheaper.

Here are some stats from EWI:

Top 10 Holdings (75.56% of Total Assets)
Company Symbol % Assets
ENI ENI.MI 24.52
ENEL Ente Nazionale per L’Energ Elet SPA ESOCF.MI 10.31
UniCredit SpA UNCFF.MI 7.37
INTESA SANPAOLO ISP.MI 6.82
Generali Assicurazioni ARZGF.MI 5.58
SAIPEM SPM.MI 4.80
TENARIS TEN.MI 4.29
FIAT INDUSTRIAL FI.MI 4.18
SNAM SRG.MI 4.01
TELECOM ITALIA TIT.MI 3.68

Some examples from this list: Enersis S.A. (ENI) has an EV/EBITDA of 0.95.  Intesa Sanpaolo S.p.A. (ISP) has a p/b of 0.33.  Telecom Italia S.p.A (NYSE:TI) (MI:TIT) has an EV/EBITDA of 3.8 and price/book of 0.59.

Yet yields are not so bad either:
· Dividend yield 5% – 18% (premium)

Readers will notice that Greek stocks also look cheap on a quantitative basis. We discussed this in a previous post titled, Ignore Greek Elections: Stocks Might Be the Best Buy in over 60 Years. The Global X Funds (NYSE:GREK), has fallen close to 20% since our article, which we think makes GREK (or select Greek stocks) even cheaper.

In fact a chart showing country valuations based on relative metrics compared to the 10-year Moving Average (Z-score) places Italy as having a valuation more attractive than usual.

Morgan Stanley European stock market scale quantitative metrics

Given this data, investors may do well not to ignore Italy. Of course there is an obvious reason why Italian stocks have these low valuations. The country is over-indebted, and many are talking about Italy as too big to fail and too big to save. Italy has a GDP of over $2 trillion, making it the third largest country in the Euro-Zone. It is rare to find cheap bargains when the economic situation is good, the best bargains come in times of economic distress.

Furthermore, the Italian economy is not nearly as weak as the media portrays it. Elliott Turner, JD has done some great reasearch on this topic. Turner points out in his article that it is repeatedly pointed out that Italy is carrying a $2.1 trillion budget deficit.  However, Italy has a large amount  of gold reserves and other valuable assets. The total amount  $73.2 billion dollars of tangible value, or 34% $300 billion of its legacy debt in 2012, which the country will need to refinance.

One of these assets is Enersis S.A (NYSE:E) (NYSE:ENI) (BIT:ENI), a publicly traded conglomerate with a market cap of $80 billion.  The government owns 30% of the company, which is worth close to $25 billion.

Not only are stocks super cheap, but Italy is in better shape than countries like Greece or Spain.

Italy may offer value behind the smokescreen of the European dustup: value investors may note that the best opportunities present themselves at such crises points.

Disclosure: Long GREK for one of my clients