What’s a valuation conscious investor to do in the face of markets hitting all-?time highs on an absolute basis, and expensive valuations on a relative basis? This is a fair question to ask, though we think it also falls victim to the framing effect. There are several implicit points embedded in this statement,one of which has serious consequences for the ultimate answer—you see, not all markets are hitting all-?time highs, nor are all markets expensive. This statement implicitly assumes that the investment pool is restricted to the United States and the United States alone. While many institutions are restricted via mandates to put their investment dollars to work in the United States, and/or U.S. markets, not everyone suffers these restrictions. Yet, many subconsciously end up the victims of what the investment community calls the “home country bias.”
Jason Gilbert’s RGA Investment: European markets remains one of the cheapest
European markets in particular remain some of the cheapest in the world today. We all know that the Eurozone went through an existential crisis of sorts, and some might argue that this particular crisis is far from over. Further, some might argue that European demographics are a concerning headwind to long-?term growth (and thus equity returns) amongst other problems. While these are valid concerns, there remains a safety valve investors can use to their advantage in making a foray into Europe more palatable. We have discussed Europe several times in this forum, starting with our July 2012 commentary, continuing with our Preview for 2013, and most recently with our August 2013 note.
One of the most important points remains how global European businesses actually are. The companies that populate both our portfolio investments and European watch list
make plenty of money outside of the Eurozone to the point where it mitigates the risk of Eurozone disintegration, and makes the demographics fears largely irrelevant.
Jason Gilbert’s RGA Investment: Eurozone’s problems remain a concern
Why do we think it necessary to make this point yet again? While the Eurozone’s problems remain a concern, we think right now is a crucial inflection point where policy imperatives shift from preservation of the “Euro project” to fostering a recovery environment. Since our first investments in Europe, the focus of the policy community on
both the monetary and fiscal side has been taking steps thatbuild confidence amongst Union members with competing interests, and building the institutional structure necessary to take the Euro from a largely fragmented collection of nation-?states, to a true Union of integrated economies.
Hints of stronger action had been growing throughout the early part of this year, as inflation was decelerating and Mario Draghi was looking for more creative policy measures to boost Eurozone economies. The firmest sign that monetary stimulus was imminent came when the Bundesbank, Germany’s own central bank that exercises considerable control over the ECB, shifted its stance from resistance to acceptance. Although during the month of May, the precise actions to be taken remained unclear, everyone in the investment communities marked June 5th on their calendar as the date when it all would take place.
Two key objectives are improving the corporate lending market and weakening the Euro, both of which would be extremely positive for European multinationals.
Jason Gilbert’s RGA Investment: The case for Groupe SEB
To that end, we commenced a position in a company we had followed since we first started looking at Europe: Groupe SEB (EPA:SK). We think Groupe SEB in particular has a confluence of favorable traits that standout amongst European companies. These are worth highlighting, below:
- The company is owned and operated by its founding family, collectively owning over 40% of the stock. This has fostered an environment of long-?term, strategic thinking, with the owners acting like and protecting the interests of shareholders.
- Groupe SEB (EPA:SK) is number one, two or three globally in most of its key product segments from pots and pans, to bread makers, to coffee machines and waffle makers. Their products include a broad array of householder essentials, everyday appliances, and premium accessories.
- The company owns some of the most recognizable household brands in the world, like All-?Clad, Krups, Tefal and Moulinex.
- With its leading brands, and global positioning the company is able to grow consistently without spending a lot of money on capital expenditures. CAPEX amounts to a mere 3.2% of revenues annually, on average.
- 36% of their sales are in the Eurozone, with the remainder around the world including large presences in Asia, North America and Latin/South America.
- Going back to 2007, the year before the Great Recession began, revenue growth has averaged over 7.5% annualized, EBITDA growth over 10% annualized, and book value has compounded at over10%.