David Herro (Trades, Portfolio), the chief investment officer for international equities at Harris Associates, appeared on CNBC on Aug. 12.
The fund manager won Morningstar's International Stock Fund Manager of the Year in 2006 and International Stock Fund Manager of the Decade for 2000-09.
In the recent interview, he talked about interesting industries that are deeply undervalued within Europe.
According to Herro, financials in Europe are priced at 60%-70% of book value. Those are similar valuation levels as seen in the great financial crisis. Meanwhile, the capital position of banks has much improved. Herro has invested the Oakmark International Investor fund (OAKIX) in names like BNP Paribas (XPAR:BNP) and Intesa Sanpaolo (MIL:ISP). These are the second and third largest positions within the fund at 4.31% and 4%, respectively.
BNP Paribas trades at 0.43 times book value and 6.87 times earnings per share. It recently generated return on equity of about 6.9%.
Meanwhile, Intesa Sanpaolo SpA's Carlo Messina is executing Europe's biggest banking merger in the last ten years. This will reshape the Italian market. Italy has three major banks by assets. Then, there are three challengers that are clearly smaller. With this merger, the #2 will swallow #6, and this turns Intesa into the largest bank in the country. Intesa trades at 0.61 times book value and at 7.08 times earnings per share.
Banks derive some efficiencies through scale, but the most important driver of profitability is industry concentration within a country. If a country is dominated by three major banks, that's a very favorable industry structure. This acquisition further cements that structure.
Herro also believes industrials on the continent are deeply undervalued as a category. The firm owns Bayerische Motoren Werke AG (XTER:BMW) in size at 3.37% of the portfolio. Known for the BMW brand, the car manufacturer trades at 7.72 times earnings per share. Analysts on Wall Street are expecting car sales to have fallen a lot because of the Covid-19 crisis. They project lower earnings going forward.
Herro isn't all-in on the old-school industries of banking and manufacturing. He also believes Alphabet (GOOG, Financial) (GOOGL, Financial) is a value stock. If you take the cash out of the market cap and look at the investments they haven't fully monetized like Youtube, then this still trades at a discount to what it should be worth. Alphabet in particular is a high quality company that should be valued higher, according to Herro.
Alphabet has a market cap just over a trillion. It holds $120 billion in cash and trades at a price-earnings ratio of 33.95. More attractively, it trades at a price-to-cash-flow ratio of 18.99.
The full clip of the interview with David Herro (Trades, Portfolio) is available through the Oakmark website.
​Disclosure: The author has no positions in any stock mentioned.
Read more here:
- Buffett Is Not Betting on Gold
- Daniel Loeb Adds Opportunistically to 3 Compounders
- David Einhorn Is Betting on Inflation
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
