Pints, post and lino: Three European stock picks
European Smaller Companies still represent an attractive opportunity for investors. While valuation multiples look reasonable having recovered from excessively cheap levels, earnings remain significantly below historical peaks, which is not the case in other regions such as the US.
Were we to see a recovery in profits, valuations could start to be very attractive. Lead indicators, while not booming, are supportive of a slow recovery, whilst Mario Draghi’s latest speech suggests an increased focus on easing at the same time as other central banks are potentially tightening.
We look forward with confidence and continue to find attractive investment opportunities.
Profiting from pints
The recent Scottish referendum has highlighted the strong patriotism and sense of national identity present in the country (irrespective of the result). Irish listed beverage company C&C is able to capitalise on this as the owner of “Scotland’s favourite pint” – Tennants.
This is a clear example of how smaller companies can be in possession of market leading brands that not only represent excellent sources of revenue but also act as a substantial barrier to new entrants. The company also owns Bulmers, the premier cider brand in the Republic of Ireland.
C&C’s Irish and Scottish business represent more than half of the company’s profits and both have very attractive competitive characteristics. These positive characteristics have been overshadowed by difficulties in the US, which has dominated market commentary. This is only a minor profit contributor however. While the international business should grow over time, this temporary setback gives investors the opportunity to buy an otherwise strong business at an attractive price.
Portuguese post paying dividends
The float of Royal Mail in the UK earlier this year dominated news flow in the country, as investors clambered to get their hands on a share they felt was undervalued and represented an interesting opportunity. We feel that in CTT, the Portuguese mail operator, we have found a similar, if not better, prospect.
As the former state postal monopoly in Portugal, it is in possession of the largest and most efficient distribution network in the region, which represents a significant barrier to entry. As has been documented, the economic downturn has hit the Iberia region particularly hard and this has exaggerated the decline in traditional addressed mail, however growth prospects still remain. Penetration of online retail is significantly below the European average and CTT is perfectly poised to benefit from the increase in parcels that has been seen in other European countries, due to increased internet shopping. CTT has also been utilising its network for the distribution of financial services which presents an additional growth angle.
Additionally, with the investment already having been made in the network and limited expenditure required going forward, investors should be party to increasing returns whilst receiving a very attractive dividend.
Taking a look at lino
Lino may have been regarded as the most unfashionable of floor surfaces for the last couple of decades since its 1970s heyday but this industry contains a hidden gem in Forbo. The Swiss firm holds a globally dominant position, allowing it to benefit from scale, both in terms of costs and distribution, as well as affording them pricing power which has resulted in sustainably high returns on capital.
Technological advances are increasing the attractiveness of the product once again, as design and colour improvements allow lino to be a viable alternative to vinyl, especially when considering its anti-bacterial and anti-allergenic properties. Forbo’s management team exhibit the characteristics we look for in a company, proving themselves to be shrewd capital allocators by focusing the business in areas where it has a strong competitive position and building a strong balance sheet position, all of which bode well for long term holders of the shares.
Sam Cosh manages the F&C European Small Cap Fund and the European Assets Trust.
These are the opinions of the individual and do not necessarily represent those of F&C Investments.