Balance Sheet Prime Factor As Always: A Look at European Valuations

Balance Sheet Prime Factor As Always: A Look at European Valuations

Barclays PLC (LON:BARC) (NYSE:BCS) does a balance sheet analysis across multiple sectors of the European market. The importance of balance sheet based investing has been emphasized on many times before, especially by Martin Whitman. This report combines leverage scores DJ STOXX 600 and shows that leverage on balance sheet is down from 20 percent in 2008 to 17 percent. Some companies with strong cash inflow have used the lower interest rates to their benefit and have built stronger balance sheets in the process. Companies now have much larger cash balance in Europe which make up about 8.5 percent of their assets. Moreover large caps are showing increased reliance on long term debt and are shedding the short term debt. The current/total debt fell from 40 percent  in 2000 to 26 percent in 2011.

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Balance Sheet Prime Factor As Always: A Look at European Valuations

While the banking sector of Europe gets a beating from bad debts and declining deposits, there are still some investable areas according to Barclays’ research. On a scoring basis, the companies that come off with good balance sheets are (Score 7 to 8.5):

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In Chemicals sector, top balance sheet scorer was Koninklijke DSM N.V. (AMS:DSM) (PINK:RDSMY).

In Aerospace and Defense, Rolls-Royce Holding PLC (PINK:RYCEY) (LON:RR). Rolls-Royce Holding PLC (PINK:RYCEY) (LON:RR) also makes luxury cars.

In Basic Resources, Randgold Resources Ltd. (NASDAQ:GOLD) (LON:RRS)

In Retail, Koninklijke Ahold N.V. (PINK:AHONY) (AMS:AH),.

In Capital Goods   Halma plc (LON:HLM).

In Construction and Materials, Tecnicas Reunidas SA (MCE:TRE) (PINK:TNISF).

In Healthcare (PINK:NVZM).

In Oil and Gas TGS-NOPEC Geophysical Company (STO:TGSO).

In Telecom Belgacom SA (EBR:BELG).

SBM Offshore N.V. (AMS:SBMO) had the lowest balance sheet score of 2.5

The analysis concludes that focus on leverage is of prime importance in sectors like, Retail, Utilities, Telecom and Autos. The Retail sector is highly leveraged and relies on off balance-sheet financing in the shape of leases. The sector is stressed due to pressure to negotiate shorter lease agreements. In case of Telecom, leverage is significant in paying dividends, deleveraging leads to reduced dividend percentage. Utilities face pressure from risks and volatility in oil and gas across Europe which could induce them to increase leveraging criteria. Auto companies may not have balance sheets that can support the phase of heavy expenditures that are needed in these kind of businesses. Moreover the car demand is contracting in Western Europe. The below chart illustrates the weakest balance sheets by sector.

Balance Sheet Prime Factor As Always: A Look at European Valuations

Overall Barclays PLC (LON:BARC) (NYSE:BCS) research rates Koninklijke Ahold N.V. (PINK:AHONY) (AMS:AH), Rolls-Royce Holding PLC (PINK:RYCEY) (LON:RR), Randgold Resources Ltd. (NASDAQ:GOLD) (LON:RRS) and Koninklijke DSM N.V. (AMS:DSM) (PINK:RDSMY)  at Overweight. While Underweight rated stock was SBM Offshore N.V. (AMS:SBMO).


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