You can read “Hunting For Value In Europe” part one and part two here.
As the market here within the US continues to hover around all-time highs, quality value stocks are getting harder and harder to find. However, European markets remain depressed, which makes them a great place to find some value opportunities.
So, in this four part series I’m hunting for value within Europe, trying to find two companies that look attractive based on their current valuation and outlook.
I have already explained the screening criteria I’m using to try and weed out opportunities in part one, but here is a quick recap:
Ben Graham’s value criteria
The criteria are, a historic P/E of less than 15 and a price-to-book value of less than 1.5. (Although these criteria are simple, they are still two of Ben Graham’s value criteria and are a good starting point to whittle down the mass of companies listed on European exchanges.) EPS CAGR of 0.1% minimum over the last four years (only some growth required, especially as Europe is in the midst of a deep recession/depression).
Net debt/EBITDA must be less than 2x and interest payments must be covered at least twice by EBIT. Eligible companies must have achieved a minimum ROIC of 10% on average for the past five years and FCF/Market cap must be greater than 5%. This should leave the most cash generative and efficient companies trading at an attractive valuation.
Out of the results, Solvay S.A. (EBR:SOLB) (OTCMKTS:SVYZY), only just makes the cut as it trades at a forward P/E of 14.4 and a P/B ratio of 1.45. Nevertheless, the company has many attractive qualities.
Founded back in 1863, Solvay S.A. (EBR:SOLB) (OTCMKTS:SVYZY) is a leading global chemicals company with plenty of experience behind it. The company specializes in the research and production of value added, innovative chemicals solutions. Around one third of the company’s sales are chemicals for the consumer goods sector, to be used in the production of cleaning products and personal care items. Solvay also manufactures specialty chemicals for the automotive, construction, energy, agriculture and environmental sectors.
Solvay’s market capitalization in Europe
The provision of chemicals to the consumer goods sector is a lucrative and cash generative business, a fact that is backed up by Solvay’s operational ratios. Indeed, Solvay S.A. (EBR:SOLB) (OTCMKTS:SVYZY)’s ROIC has averaged approximately 10% per annum for the last five years and FCF/Market Cap on average for the last five years has been just over 10%. Note: Solvay’s European peer Reckitt Benckiser Group Plc (LON:RB) (OTCMKTS:RBGPY), also a producer of chemicals for the consumer goods market exhibits similar traits. However, Reckitt’s valuation is significantly above that of Solvay.
Debt is low and the company had a net debt/REBITDA ratio of 0.9x at the end of the third quarter. That being said, Solvay S.A. (EBR:SOLB) (OTCMKTS:SVYZY) has a pension deficit, and including these liabilities the company’s net debt/REBITDA ratio jumps to 2.5x although this is above the criteria stipulated above, Solvay’s debt looks manageable and the company’s gearing is only 22%, 63% including pension obligations — so as of yet the company is not in a dangerous position.
What’s more, it is hard to ignore Solvay S.A. (EBR:SOLB) (OTCMKTS:SVYZY)’s impressive historic growth rate. Over the last five years, Solvay’s EPS have jumped 650%, operating income has jumped 180% and net income has expanded 300% and it looks as if this growth is set to continue. Solvay’s management are currently expecting 2013 REBITDA of €1.65 billion but are forecasting that REBITDA will hit between €2.3 billion and €2.5 billion by 2016, that’s 52% growth if the company hits the high end of estimates.
