Hunting For Value In Europe [Part 2]: Danieli Well-Positioned For Profit

Hunting For Value In Europe [Part 2]: Danieli Well-Positioned For Profit
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You can find part one here.

Continued from part one: Danieli & C Officine Meccaniche S.p.A. (BIT:DAN) (BIT:DANR) has its main listing in Europe, Italy to be specific, but the company has operations around the world, which is why it has been able to outperform during the past few years, without being overly affected by the European economic crisis.

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The majority of Danieli & C Officine Meccaniche S.p.A. (BIT:DAN) (BIT:DANR)’s operations are based in Italy, but the company has a presence in almost every other European country, including Sweden, Russia, Poland, Turkey, Germany and the UK, to name but a few. These are some of the Europe’s strongest economies and although Danieli does have operations within weaker European nations like Greece and Spain, exposure to the stronger economies, most of which are still growing, more than compensates.

Danieli not constrained to Europe

But Danieli & C Officine Meccaniche S.p.A. (BIT:DAN) (BIT:DANR) is not confined to Europe: the company also has operations within China, Japan, Brazil, Saudi Arabia, India and across North America. So, it would appear that calling Danieli a ‘European’ company is somewhat misleading.  For example, during the third quarter of last year, 46% of Danieli’s revenue was from Europe and Russia, 28% was from Asia, 13% from the Middle East and 13% from the Americas. Still, even though Danieli is a globally diversified industrial company its fortunes are dependent upon the state of the global economy.

Unfortunately, the outlook for the global economy is mixed but Danieli’s management are particularly downbeat about the future, expecting things to get worse before they get better.  This was the Danieli managements’ ‘Outlook’ statement within their third quarter results:

…we feel that opportunities for large orders in the plant engineering and manufacturing segment (Plant Making) will become less frequent and in any case with lower margins both in the current financial year and in 2014/2015, while in the Steel Making segment the market remains volatile, even though we estimate that the current year could end better than the previous one, with slightly greater volumes and margins than in 2012/2013. The prevailing view is that some type of recovery will take place in late 2014 and will consolidate in 2015…

However, this statement written and published at the end of September last year and since then green shoots have started to emerge within the steel industry.

Green shoots in the US steel industry

Indeed, according to Marcus Ketter, CFO of German-based steel distributor Kloeckner & Co SE (ETR:KCO), Europe’s largest steel distributor, the steel market is likely to remain weak in Europe for 2014 but in North America a recovering auto industry, a buoyant construction sector and energy boom are all driving the demand for steel. A combination of these three factors pushed US steel prices higher during the second half of 2013.

What’s more, according to two steel industry behemoths, ArcelorMittal (NYSE:MT) and Tata Steel Limited (BOM:500470), the industry’s two-year slump is now over and prospects for 2014 are looking up. Tata Steel in particular, flagged rising prices in its third quarter results and said performance in Europe had improved, though challenges remained.

These comments and trends imply that Danieli’s management was being overcautious when they issued the statement above, which warned of tough times ahead. A recovery in the global steel market will be positive for Danieli but it is likely that steel producers will want to see a sustained recovery before they start investing in capital projects again. This could mean that there is some lag-time between a confirmation of recovery in the market and a rise in Danieli’s profits.  Nevertheless, the industry’s outlook is improving and Danieli currently trades at an attractive valuation with a strong balance sheet so the company should be well placed to ride a recovery.

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