21 December 2006

Fiat Group share price to double within three years?

I cannot hide the fact that I've always had a love for Italian cars. Whereas colleagues tend to go for Volvos, BMWs or Audis, I have always driven Italian cars and I am not planning to change. In December 2005, I recall having mentioned that three car makers I considered good to have in one's portfolio: Toyota because of it's strong position in the US market and innovation in green technologies (which I think have a great future in this industry), Tata Motors because of its position in the Indian market - which is a real growth market - and Fiat, for the simple reason that the company seems to crawl out of its financial pit. Whilst Fiat only launched a couple of interesting new models in 2006, the Sedici, the Alfa Romeo Spider and the Alfa Romeo 159 Sportwagon and the New Ducato, 2007 looks much more promising. With the launch of the Fiat Bravo, Linea and 500 next to the Alfa Romeo 159 Crosswagon, the 8C Competizione and the New Scudo being planned, 2007 is certainly going to be a critical year in the company's latest business plan, presented last November. The four-year plan included predictions on the number of worldwide car registrations. Lancia is expected to be the fastest growing brand in the Fiat Group, but needless to mention that the bulk of the Group's growth comes from the Fiat brand, which already makes up some 70% of the Group's car registrations. The key figure is the expected growth of 65% in worldwide Fiat Group car registrations, which I would say is at the least ambitious. This growth is expected to come mainly from China & India (2010/2006 =+825%), Russia (to 130k units from scratch), Turkey (+91%) and Western Europe (+43%). It is no secret that the car industry is very volatile, with high fluctuations in market shares. This explains why a 43% growth in Western Europe may actually be feasible as it only represents a market share increase from 8% to 11%. Knowing that Fiat holds quite a strong position in many of its key growth markets, growth should certainly be very healthy in the coming years. The above is reflected in the company's financial targets: Group revenues are to increase by 7.6% y/o/y. As if that is not enough, EBITDA is expected to increase from Eur 3.6bn in 2005 to Eur 8.6bn in 2010! This means an increase of 139%! Now, this is all very nice and very ambitious but these are simply targets set by the company itself and give no reason to believe that these targets are actually going to be met. But the thing that does give me confidence is the fact that the financial improvements made in 2005 and 2006 are to be admired, especially when it comes to improvements of the bottomline. Today, Fiat S.p.A. trades at Eur 14.50. I am of the opinion that the Fiat share price could double in three years (certainly beats putting the money in your bank account), even if actual results are somewhat shy of current targets. EPS should reach at least Eur 2.50 in 2010.

18 December 2006

Will Aareal Bank AG exceed its targets again in 2007?

I just cannot stop mentioning it and thankfully, I am not the only one mentioning it: buy banks, buy banks, buy banks for 2007! After having covered Capitalia, Banco Pastor and ABN Amro, I think it is about time to give my opinion on some of Germany's banks. There are two banks that I particularly like: Aareal Bank AG and Commerzbank, for the simple reason that I am impressed with there EPS growth scenarios. I willl focus on Aareal Bank, which is a real estate bank that seems to be doing very well. After Aareal Bank achieved its full-year new business target of Eur 7 bio already in the first nine months of 2006, it decided to raise the target to Eur 8 bio for 2006, of which 89% comes from Europe. In order to diversify geographically, a new office is planned in Shanghai, which will open up the Asian market, in addition to its growing presence in USA. Its portfolio is well-spread and revenues are received from residential housing, offices, retail, hotels and logistics. Aareal Bank is certainly on the right track when it comes to Non-Performing Loans, with these NPLs being down from 10.7% of its portfolio in 2004 to an estimated 3.1% in 2006. With this impressive improvement, the company has gained a lot of credibility with investors. And when studying its other targets for 2006, whether talking about RoE, Operating Profit or loan loss provisions, all targets are destined to be met. Coming back to EPS growth, this is quite a story: whereas EPS is around 2.21 this year, the sale of property by Interhotel Gruppe (in which Aareal Bank owns a 33% stake) should boost EPS to over Eur 4.00 in 2007. For 2008, the EPS is expected to be Eur 3.00 - 3.50, which should justify a share price of around Eur 42 next year, but if targets are exceeded in 2007 as was done this year, there could be much more lying ahead of us. Aareal Bank is also a potential prey as the real estate industry becomes an increasingly hot target for M&A-mania, as seen in today's takeover of Realogy. To summarise, I believe that a target of 25% above today's Eur 35.50 is feasible in 2007.

16 December 2006

Iberia's credible business model

Sometimes you come across these companies which you almost instantly develop a feeling of admiration for, simply because of their business model. One of those companies for me is Iberia. Iberia Lineas Aereas de Espana S.A. - as it's officially called - has had three difficult years, with competition getting stronger and stronger, especially on domestic and medium haul flights. Competition on medium haul flights (read: flights within Europe to or from Madrid) mainly comes from low cost carriers and Air France/KLM. Especially the low cost carriers are gaining market share rapidly and this has slightly eroded Iberia's market share as well as its margins. A similar thing is happening in the domestic market where SpanAir aims for market leadership in 2009 and high speed train operator AVE will also offer strong competition. In that situation, there are two things you can do: become a price fighter and see margins erode further with at best a stable market share or shift your focus to other markets. Well, Iberia has chosen to do both. The Spanish airline company has decided to increase its focus on long haul and aims to make Madrid the number one hub for flights to and from South America. The past two years, it has been rather successful and saw its position improve into taking over market leadership on Madrid to South America flights from Air France/KLM. Moving up from a current 18.7% towards a 23% market share in 2008 is considered 'feasible', despite tough competition from low-cost AirMadrid as well as Aerolineas Argentinas. In addition to improving its market share on these Atlantic flights, Iberia is also helped by an improving economic situation in South America, which leads to a healthy increase in air traffic. At the same time, Iberia set up its own low cost airline company 'ClickAir' in February this year. Another factor one should take into account is fuel prices. The expectation for fuel prices in 2007 is certainly more favourable than the 2006 situation, which should have a positive effect on corporate earnings. The company's plans to focus on profitability before topline growth - through an increase in business class tickets and self check-in and savings in personnel cost - should create some extra shareholder value. This has led analysts to be very positive about EPS estimates for 2007, which are expected to double. Now one could say that the stock is not undervalued at this time, which is probably true. But against this, the strategy of changing its corporate focus whilst improving profitability is one that certainly seems to pay off. I would therefore still recommend this stock at its current price of Eur 2.81, strongly influenced by its credible business model as well as by recent strong rumours on Lufthansa interests in Iberia. Update: Businessweek reports that AirMadrid has just seen its licence suspended by Spain's Civil Aviation authority, leaving thousands of passengers stranded.

13 December 2006

ABN Amro's role in the consolidation of European banks

Let's talk banks again today. Not because I am so greatly fascinated by banks, but simply because there's something going on in this industry. After having covered Banco Pastor and Capitalia last month, I'd like to add some more general thoughts today, in particular on Dutch bank ABN Amro. The banking industry, and more specifically the European banking industry, is one that is very fragmented and awaits -in my humble opinion- a major consolidation in the years to come. This is the major reason why I think 2007 is going to be the year that is going to blow some dust off of these financials. This view is backed up by a report by Deloitte (PDF!), which compares the European banking industry with the American banking industry before a consolidation took place. Then there is the fact that Dutch banks generally have quite attractive (I would almost say 'competitive') P/E-ratios. For instance, ABN Amro is valued at 10.7 x earnings, ING Group at 9.8 and Fortis at 9.5 even. If you compare these valuations to those of their European peers, it becomes clear that there is somewhat of a discount. Dutch banks are also on the move. They are eyeing new markets and the best example of this was ABN Amro's acquisition of Banco Antonveneta, which may have opened up the Italian banking market for other European (or even American) players. There is certainly no consolidation needed in this industry in the Netherlands. The combined assets of country's five biggest banks made up 84% of total Dutch banks' assets. This is quite the opposite of Spain, where the five biggest banks made up 44% of total Spanish banks' assets, UK (33%), Italy (27%) and especially Germany (22%). But that does not mean that ABN Amro is not a potential prey for foreign banking groups, as was pointed out by rumours lifting ABN Amro's share price 3% today to Eur 24.10. CEO Rijkman Groenink has always maintained his view that ABN Amro is for sale if the right price is offered. However, the likelihood of ABN Amro being swallowed by a bigger fish is in my opinion quite low and I therefore tend to speculate that it will rather be the one playing its own strong role in the industry's consolidation. And this could be a reason why this bank is attractive, as shown in latest figures on the integration of Banco Antonveneta. Synergies appeared to be much higher than initially expected and restructuring costs much lower. The operating efficiency ratio of ABN Amro may have been higher than that of Antonveneta before the acquisition, but the deal was easy to justify: a similar package of banking services costs an Italian customer an average Eur 250/yr, compared to an average Eur 45/yr for Dutch banks' customers. Also, the customer satisfaction rate in the Italian banking industry is around 15% versus some 85% in the Dutch banking industry*. After seeking the right preys and after getting the required experience in restructuring and integrating these targets, the acquiring parties may be the ones thriving in the years to come. There is great potential in streamlining the diverse natures of Europe's banking industries and knowing that the one who moves first is often the one who is most successful, I would say that ABN Amro has a lot in store in the coming three years. Antonveneta might just be the start of a beautiful story. * 2004, KPMG research report 'Banking Beyond Borders'

10 December 2006

Strong earnings growth may boost Hagemeyer

This is the first time I am covering a stock that has a Netherlands listing. Usually I tend to look abroad to find nice opportunities, but this one I just cannot miss out on. Hagemeyer N.V. is a Dutch B2B distribution services group that provides its products and services to electrical contractors and installers in the commercial and industrial market, as well as to industrial users. The company has seen three years of severe financial misery, after serious operational disruption in USA, UK and Germany. But the recovery is there, with net losses having improved from Eur 318 mio in 2003 to Eur 141 mio in 2004 and Eur 58 mio in 2005. A simple extrapolation here wouldn't be far from the truth: Hagemeyer will be profitable again this year. Based on the current share price of Eur 3.58, the forward P/E (2007) is at 10.5 about half of the sector average, whilst there is certainly room for some positive surprises in the coming year. EPS is expected to be at least 50% higher than this year's earnings, which means that we may expect a share price that reflects this strong growth. It must be said that Hagemeyer's Q3 revenues were somewhat below expectations (9.1% vs the 11.5% consensus) and that the company is vulnerable to a weakening US Dollar, but the extent to which the share price has taken a hit since Spring this year is not at all justifiable. Especially if you consider that the company still plans to achieve revenues of Eur 6 bln this year (+7.2% over 2005), with 6% revenue growth expected for the coming years. CEO Rudi de Becker certainly made a change since he joined the company in 2004 and in my opinion Hagemeyer still has a long way to go, but I certainly have regained confidence in the company's management. Based on its strong expected earnings growth combined with revenue growth, I see at least a price target of Eur 5.00 for 2007.

07 December 2006

The promising turnaround of Rhodia

French chemical giant Rhodia SA is one of those companies that many investors might not feel much affinity with, based on the sectors it operates in. Its products are among others used in coatings, tyres, pharmaceuticals, cigarette filters and fragrances, but can simply be divided into three groups: 'application chemistry', 'specialty materials & services' and 'fine chemicals'. The first two groups are the main ones and together make up almost 90% of the company's sales value (2005) of Eur 4.5B. Total group turnover decreased for years and years and the share price fell from Eur 30 in 1998 to an absolute low of Eur 1.16 in 2004. But the turnaround is there, with positive earnings expected for this year The forward P/E in 2007 (17.0) is well below sector average (25.3) with impressive results booked in downsizing headcount and growth in sales & EBITDA. If Rhodia continues to perform well in 2007 and if estimates are met, a share price increase of 50% should be possible. 2006 Was also the year for Rhodia to restructure some of its BU's, where a new BU Energy Services has been created, focusing on the ever-hot item 'greenhouse gas emissions' and a more efficient structure has been built. At a current price of Eur 2.60 (NYSE:RHA - USD 3.39), the stock is close to being overbought in both day and weekchart, but with an expected EPS growth from 0.03 currently to anywhere in a range from 0.15 to 0.25 in 2007, Rhodia is destined to be among Europe's star performers in the chemical industry. Rhodia is listed in Paris (Eur 2.60) and at the NYSE (USD 3.39).

05 December 2006

DRD Gold's stockpiles of misfortune

DRDGold Limited, a once very succesful South African mining company which had a share price peak of USD 50 in 1980, might need some four leaf clovers. Today's announcement that the company will restructure its 79%-held subsidiary Emperor Mines after the Australian company shut its Vatukoula gold mine in Fiji, saying it was no longer economically viable to continue operations, was certainly not the first bad sign this year. A fire at its South African Blijvooruitzicht gold mine led the company to halt production, leaving investors worried. Just prior to that, investors swallowed news on a gold production halt at Tolukuma, the Papua New Guinea mine wholly-owned by DRDGold's 79% subsidiary Emperor Mines. In addition to that, there is the uncertainty regarding a new successor for soon to retire CEO Mark Wellesley-Wood as it is a well-known fact that investors are generally not too keen on management instability. All this has led the share price to drop 35% this year and almost 25% in the last month. In the 2006 financial year gold output of its Vatukoula mine decreased by 81% as all sections of the mine were temporarily closed. The Fiji mine was to contribute practically one third (!) to the 2007 output target of the company's subsidiary Emperor Gold. On a more positive note, most of DRDGold's restructuring costs have been made, leading the company to drastically narrow its losses in FY2006. But one should wonder what is left of its new strategy to focus more on its Australasian mines, which leaves only a 20% stake in the Porgera joint-venture and its fully-owned Tolukuma gold mine, both located in Papua New-Guinea. There is certainly a lesson to learn here: investing in mining companies knows many risks other than geopolitical risks or price fluctuations in metals. But it must be said that with so much misfortune, there aren't many risks left for DRDGold. With a share price below one US Dollar (NASDAQ:DROOY), we can only wait until better news comes. For the moment, this is certainly a stock that needs to bottom out, but things can really only get better from here. And that... is the reason for me to start putting this stock on my watchlist as of today. Update: This post has also been supplied as a column in Dutch to edelmetaal-info.

02 December 2006

Vallourec and the midas touch of Vincent Bolloré

Sometimes you can simply buy companies because of the management or because someone specific bought a stake in the company, simply based on the confidence in that management or in that stakeholder. Vincent Bolloré, now worth USD 1.7 bln according to Forbes 500, is one of those people. His career began when he took over the family-owned conglomerate Bolloré, which is active in the maritime industry & cross-border trade with African countries. Then, he took a large stake in French construction group Bouygues, which he left a while later with quite some more money in his pockets. Some two years ago, he decided to buy a stake in Havas, a French advertising group of which he now is President and single largest shareholder after mounting a coup in 2005. Also in that year, he started building a stake in independent British market research group Aegis Group PLC. He has been aiming for a position on the board with his 29% stake, but has not succeeded so far. Whether you like his unorthodox way of buying himself into companies, what he does is usually good for shareholders. A great example of that is the French world leader in seamless steel tubes: Vallourec Group. But Vincent Bolloré having a 7.5% stake and being a member of the board is certainly not the only reason to invest in this company. Vallourec will be included in the CAC40 as of this month and has been known for keeping shareholders extremely happy. German steel producer Salzgitter sold its stake recently and benefited heavily. But growth is not over yet. Vallourec’s first half year net profit rose 214% compared to the previous year and the group expects sales for the second half year to be at least of the same magnitude. Especially encouraging is that the group foresees no slowdown at all in the oil, gas and power segments. Vallourec is currently looking at some acquisitions, especially in Europe, which should bring some more topline growth. Vallourec currently has a P/E of 13.5, below the sector average of 15.1. The current share price is EUR 201 and I would consider a share price target of at least EUR 250 in the first half year of 2007 realistic, concerning the sector strength and the company’s rapid growth in sales and profits.

30 November 2006

Solar power revisited...

One of the most beautiful examples of how a Government can almost single-handedly create an entire industry is Germany. Thanks to the so-called "Feed-in Law" in Germany, customers receive preferential tariffs for solar generated electricity depending on the nature and size of the installation. This, and several other advantages of solar power created by German Government, has led Germany to become the fastest growing photovoltaics (PV) market in the world in 2005. This trend could also be seen on the German stock exchanges, where solar power companies have emerged from the ground like mushrooms. Stocks like SolarWorld AG (FRA:SWV), Ersol Solar Energy AG (FRA:ES6) and Q-Cells AG (FRA:QCE) have all performed very well until 2004, but it was in 2005 and early 2006 when most of these companies saw the stockmarket hype end. Alternative energy lovers quickly moved from solar power to ethanol and uranium and most solar stocks have not gained much since. The reason for this was one underlying question: can solar power become efficient enough without Government aid? And consequently, the question arose whether Government should keep funding the sector. Should fossil fuel costs go up, the efficiency gap decreases and it is expected that the US solar energy market - now considered to be five years behind Germany - would then become much more competitive. Washington-based Solar Energy Industries Association (SEIA) projects that the U.S. will be the world's biggest market, with $25 billion in revenues, within five years. SolarWorld AG could be one of the companies benefiting as it focuses on delivering cost-effective technology for the end-user, helped by its strategy of vertical integration. It now is the second largest integrated solar company in the world, after Sharp. This year, sales should increase 43% to just over EUR 500 million and group profits climbed 319% to EUR 63.3 mio y/o/y in the third quarter only! With such continued strong financial performance, the stock is expected to rise again soon. SolarWorld currently trades at around 21 x earnings, which is significantly below the sector's p/e of 27. Technically, the stock looks ready to go up again and I would consider a 50% increase from its current price of EUR 46.08 realistic in 2007.

28 November 2006

Paddy miners: a comparison

Compared to the Canadian and American stock exchanges, there aren't many mining companies listed in Europe and those that we tend to find easily, are not always very promising. But today, I want to shed my light upon three Irish mining pennystock companies: Ovoca Gold PLC (ISE:OVGL), Ormonde Mining PLC (ISE:ORQ) and Kenmare Resources PLC (ISE:KMR). All three also have a London listing. A small comparison:
  • First of all, those that are averse to taking any political risks might choose for ORQ, which has all of its mines located in Spain. Au contraire, OVGL has great exposure to Russia and KMR to politically unsafe Mozambique.
  • Metals-wise, there are also differences. KMR considers the Moma Titanium Minerals project its main asset. OVGL is mainly active in silver through what is said to potentially be the world's highest grade silver mine: Goltsovoye in Northeast Russia. In addition to that, its Kola Peninsula Exploration projects have gold, copper and molybdenum prospects. ORQ mainly operates gold mines in Spain, but also has prospects for copper, silver, tungsten and antimony (increasingly being used in the semiconductor industry) and recently found zinc at its La Zarza project.
  • Not unimportantly, when are these companies planning to start producing? KMR is certainly closest to production, with long-term potential for significant increases in output. ORQ has two projects in advanced evaluation stage: La Zarza (Au/Cu/Ag) and Salamón (Au) and several other projects in early evaluation stage. OVGL hopes to start producing in Q4 2008, which is partly the reason why the stock is so thinly traded.
Obviously, all three have potential. KMR's biggest plus is that its nearing production, but OVGL holds a very attractive silver development asset and has an experienced management team. ORQ however, clearly has the best mix of assets, but has an exploration risk to go with that. KMR seems best for the short term, while ORQ has my preference for the long-term. OVGL - I would say is the riskiest bet, considering the 'juniority' of its projects. But if you want to become filthy rich, you have to take some risks in the end... ORQ can be considered for buying at the current price of EUR 0.24. Update: This post has also been supplied as a column in Dutch to edelmetaal-info.

27 November 2006

Capitalia: the next prey?

Last year, Dutch bank ABN Amro took over Italy-based Banco Antonveneta. To many investors, this seemed a very risky move as the Italian banking industry is not known to be the easiest one to break into. ABN Amro has certainly experienced this, but succeeded at the end of the day. Banco Antonveneta, being the eight largest banking group in Italy, only holds a 3% market share in the Italian market and should therefore certainly not be considered the end of ABN Amro's Italian ambitions. Keeping in mind the above whilst also considering the 7.7% stake that ABN Amro holds in Rome-based Capitalia Gruppo Bancario (MIB:CAP), the most likely scenario is easy to guess. Reuters also mentions that 'corporate marriage' is high on shareholders' agendas. With net profit expected to rise 27% to EUR 1.4 bln, the bank is certainly expected to perform well, which is also reflected in the share price. To a certain extent, the share price includes an acquisition premium, but this premium did partly evaporate as Banca Intesa and Sanpaolo IMI merged to create Italy's biggest domestic lender and a European top eight bank. ABN Amro focuses on Antonveneta "for the time being", so says ABN Amro CEO Rijkman Groenink. No further comments were given with regard to a potential merger of Antonveneta and Italy's fourth largest bank Capitalia, but the likelihood increases day by day. Speculative buy at a current price of EUR 7.10.

26 November 2006

Banco Pastor: a strong focus on shareholder value

Banco Pastor S.A. (MCE:PAS) is the 7th largest banking group in Spain and may be considered a relatively small, but growing bank. The Group has 48% of its 569 branches in Galicia and 52% spread across Madrid, Catalunya, Levante and Andalucía and has a target of 700 branches in 2008. Banco Pastor expects to double the average shareholder value created by the Ibex35, based on an ROE increase from 13% in 2005 to 19% in 2008. Currently, Banco Pastor is well on schedule and this is certainly reflected in this year's share price growth. After the stock split in June this year, it moved from 10 to well over 14 in five months. Still, enough potential for the coming years. Dividend has been stable at an annual EUR 0.52 per share. Another reason to buy is that this bank considered one of Europe's most likely banks to be taken over, according to NCB. Currently, the fund looks overbought in the daily chart, hence it may be better to wait for a correction. Anywhere below EUR 13 should be a great chance to buy.

Gettin' Started

Dear reader, You're now looking at the start of something beautiful. I'm gonna be posting a lot of tips here on great ways to make money using international stock exchanges. Mostly, the European exchanges. For one simple reason: it's hard to find good information on European stocks, whereas there are loads and loads of blogs and websites on American stocks. Keep checking as I will be doing my utmost to make this a success. Hopefully with your support! Best regards, Joey Keasberry