Hunting For Value In Europe [Part 1]: Investor Caution Creates Opportunity

Updated on

Unfortunately, quality value stocks are getting harder and harder to find in this market, as investors become ever more upbeat about the United States’ economic outlook. However, investors are still cautious about Europe’s economic outlook, which makes the European markets a great place to find some value opportunities.

Europe: narrowing the focus

I’ve screened the markets within Europe for companies with 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.) Next, I filtered the results for companies that had seen sales, or EPS rise at a minimum CAGR of 0.1% over the last four years, (only some growth required, especially as Europe is in the midst of a deep recession/depression).

What’s more, risk needs to be considered, so companies with a net debt/EBITDA ratio of greater than 2x were excluded. Interest payments must also be covered at least twice by EBIT. Even with this list of criteria, more than 100 opportunities within Europe showed up on my screen. To narrow the list down, I screened for companies that had achieved a minimum ROIC of 10% on average for the past five years and then to cull the list further, I removed all remaining companies with a FCF/Market cap of less than 5%. This left me with the most cash generative and efficient companies trading at an attractive valuation.

From the remaining results, Danieli & C Officine Meccaniche S.p.A. (BIT:DAN) (BIT:DANR) looks like an interesting pick. Danieli in an industrial company engaged in the design and construction of equipment and parts for the metal industry. This includes items such as continuous casting plants, long products rolling mills, conditioning plants, non-ferrous plants, direct reduction plants, flat products hot rolling mills, tube and pipe mills, bar cold finishing lines and cranes. So, as you can imagine the company is cyclical by nature.

Nevertheless, on a valuation basis at least, Danieli & C Officine Meccaniche S.p.A. (BIT:DAN) (BIT:DANR) looks attractive. In particular, at current prices Danieli trades at a forward P/E of 11.2 and a P/B of 1.1. However, the company also has a net cash balance; impressive for an industrial company, even more so considering the global economic environment.

Danieli looks attractive at first glance

At the end of the third quarter of last year, Danieli & C Officine Meccaniche S.p.A. (BIT:DAN) (BIT:DANR) had €1.8 billion in cash and a net cash position of around €1.4 billion. That being said, at present, Danieli has a market capitalization of €1.8 billion implying that the company’s valuation, excluding cash, is significantly lower than the figures above. On the other hand, the company’s shareholder equity is actually almost the same as its cash balance, so while net cash is worth €18.90, book value per share is €19.40.  As a result, I am hesitant to place an ex. cash valuation on the company as I feel it would be misleading. Still, Danieli’s had a current ratio of 1.3 at the end of the fiscal third quarter.

Away from the balance sheet, Danieli & C Officine Meccaniche S.p.A. (BIT:DAN) (BIT:DANR)’s revenue has expanded a compounded 30% during the past four years and the company’s FCF during the last reported financial year was €125 million a FCF/Market cap value of 7%.

So, Danieli’s valuation looks attractive and it would appear that the company’s revenue is bouncing higher despite Europe’s economic troubles. But what about the company’s outlook?

Continued in part two…

Leave a Comment