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Geoff Gannon
Geoff Gannon

How to Pick Stocks in Spain, Italy and Portugal

April 17, 2012 | About:

Someone who reads my article asked me this question:

Hi Geoff,

I'm a Belgian student, so my research on stocks is somewhat more focused on Europe. I have no clue about the future of the euro, but I have been looking into Spanish, Italian and Portuguese stocks and I have found a good one I think. The company is Portugal Telecom (PT). I won't detail my whole thesis, but the point is that they have a wonderful position in the Portuguese market, in a business which is basically a utility (Internet, carrier, cable). They're very shareholder friendly, and it looks like a high-quality management... I must say I’m a bit worried about their debt. What are your thoughts?


Like you, I’ve also been looking at Spanish, Italian and Portuguese stocks.

You may have seen this article about why Spain may be the best place to invest now.

But telecom is way outside my circle of competence. So, I don’t look at telecom companies. They are cheap all over the world. Here are the current dividend yields – according to Bloomberg – of a handful of telecom companies:

· Deutsche Telecom (Germany): 8.15%

· Swisscom (Switzerland): 6.52%

· Nippon Telephone & Telegraph (Japan): 3.81%

· KT Telecom (South Korea): 6.54%

· Telefonica (Spain): 11.57%

Those dividend yields sound impressive. But would I feel safer owning those stocks of:

· Waste Management (WM)

· Mattel (MAT)

· Hasbro (HAS)

· Kimberly-Clark (KMB)

Which all yield 4%. George Risk (RSKIA) doesn’t trade much above its cash per share and it also yields 4%. I own some Japanese stocks that trade around net cash and that also yield about 3% vs. the 3.8% you can get in NTT.

So, a telecom company would not be my personal choice.

I wouldn’t invest in a company with a lot of debt and with customers who have fast-changing habits just so I could get another 1% to 3% a year in dividends.

I write the Buffett/Munger: Bargains Newsletter. To explain why I pick the stocks I do for that newsletter – they sometimes have pretty high P/Es for “value” stocks – created this little Warren Buffett checklist:

1. Simple Business

2. Favorable Long-Term Prospects

3. Able and Honest Management

4. Consistent Earnings

5. Good Return on Equity

6. Little Debt

7. Very Attractive Price

For me, these telecom companies fail on Nos. 1, 2 and 6. They pass Nos. 4, 5 and 7. I can’t evaluate No. 3.

With the exception of consistent earnings, the telecom companies basically fail the safety requirements of a Warren Buffett-type approach. They have debt, they have changing customer habits and I don’t think the businesses are simple at all.

Now, people who understand telecom better than me can certainly figure these stocks out. And these big telecom companies would probably make a good worldwide contrarian basket that you buy and then sell a few years from now – rather than buying one stock and hanging on to it for a decade like Warren Buffett might.

But, again this is not really about telecom companies. It’s about me. I don’t really like investing in a business with changing customer habits. I’ve done it before. See Barnes & Noble (BKS). I don’t have the best track record investing in businesses where customer habits are changing. And I feel telecom falls in that category.

Also, I’m peculiar in that I don’t use any of the services these former telephone monopolies offer. I don’t have a landline (I use Skype), I don’t carry a cell phone and I don’t use a telephone company for my Internet.

I pay Time Warner cable for my Internet. Then I go out and subscribe to specific services like Skype, Netflix, Hulu, Amazon Prime, etc., to get the phone and video I want. I don’t pay Time Warner for either phone or TV. And that’s not a cost issue. It’s just a preference in terms of what I want my daily routines to be. I don’t want it to be sitting on a couch flipping channels.

Obviously, my habits are not most people’s habits. Most people use cell phones. Most people have landlines. Most people pay for actual cable TV.

But it’s not a good sign that I don’t miss any of those things at all. And if it was a choice between Netflix, Hulu, and Amazon Prime – which all together cost less than $25 a month – and something like Verizon’s Fios, I definitely prefer the first option and it’s nice that it costs less. But that’s not the reason.

So I think we can overestimate the extent to which the reliability of these companies’ earnings comes from selling something people need. It may not matter. People don’t need Coca-Cola (KO). But it has some very utility like features simply because a strong enough habit is effectively a need – until it’s not.

I don’t doubt that these networks are going to move a lot of data. I wonder how much the carriers will get paid relative to the investments they make. It’s totally possible the future will look a lot like the past for these guys.

I’m not negative on telecom companies. But when I look at a lot of these companies in terms of their debt levels, enterprise value to EBITDA, price to book, and the amount of change in their businesses – I’m just not sure if a telecom company should be your first choice in Portugal, Spain, Italy, etc.

Let’s take Portugal as an example. You mentioned Portugal Telecom. We’ll compare that to another Portuguese possibility:

Corticeira Amorim.

According to Bloomberg, Amorim’s dividend yield is 4.75%, P/B is 0.65, the trailing P/E is 6.5, the forward P/E is 5.5 and the enterprise value to EBITDA is 4.3.

They have debt. Quite a lot actually relative to their market cap. Which I’d prefer not to see.

Corticeira Amorim is a “hidden champion.” That means it was featured in one of my favorite books of all time.

It’s a family-controlled cork company. It make wine corks, cork floors, cork insulation, etc. There’s a very good two-part look at the company over at Oddball Stocks:

Looking at Hidden Champion Corticeira Amorim Part 1

Hidden Champion Corticeira Amorim Part 2

You should read those posts. I’d consider this company. Now, when I say it’s a hidden champion that doesn’t mean it’s a great business. It just means it is competitively strong in its niche. And it’s a survivor.

Carnival (CCL) is strong in the cruise business. It controls half the market. But it only achieves moderate returns on capital. Boston Beer (SAM) controls 1% of the U.S. beer market. It also happens to earn several times more money per dollar invested in its business than Carnival does.

This isn’t unusual. Certain businesses – even when you are not the market leader – are just very profitable. When you’re selling people on a special experience, a branded experience, and the price isn’t that high compared with their resources, and they’re buying these things one at a time (drip, drip, drip) not noticing just how much money a Starbucks (SBUX) stop a day for a year really is – then they aren’t that sensitive to price. Especially if everything about the experience other than the price is pleasant.

Amorim isn’t in that kind of business.

I don’t think selling cork is the best business in the world. But, at a mid-single-digit P/E ratio as long as Corticeira Amorim proves to be a perfectly decent, perfectly durable business you’ll make 15% to 20% a year in the stock. That’s just how the math works when you buy something at a P/E of 5 or 6 and it doesn’t destroy value.

Corticeira Amorim has roots going back 140 years. Even if we ignore the predecessor companies, we’re still talking about a family controlled company that’s been around for the better part of a century. Cork has been around for a while too. All cork comes from three countries: Portugal, Spain and Italy. The majority comes from Portugal.

I think a cork company might be easier to figure out than a telecom company. And it’s not more expensive. In fact, in terms of price-to-book, price-to-earnings, and enterprise value to EBITDA I think it’s actually a bit less than Portugal Telecom.

If you don’t want to buy specific companies – you can buy country ETFs for Spain and Italy. Be careful though. They are heavily skewed towards their biggest companies. And those big companies are often in one or two industries. An investment in the Spanish ETF – iShares MSCI Spain Index (EWP) – is really just an investment in some banks, telecom, and – well that’s more than half the ETF right there:

· Finance: 40%

· Telecom: 19%

And here’s Italy’s ETF (EWI) by sector:

· Energy 33%

· Finance: 25%

· Utilities: 15%

That’s three-quarters of the ETF. So, only buy the Spain and Italy ETFs if you really don’t want to look at specific companies because you doubt your own judgment picking stocks in a foreign land – not because you think you’re getting a lot of diversification. You’re not. If you want diversification inside these countries, you’re probably better off picking smaller stocks like Corticeira Amorim that are not in energy, finance, telecom, etc.

Consumer businesses account for virtually none of these ETFs. And the industries that are represented tend to be businesses with a lot of debt and with a lot of property that needs to be replaced regardless of what happens with inflation in the country. Inflation may not seem like a very big concern now – while these countries are on the Euro – but if they go off the Euro, you can end up with some unfortunate mismatches between the debts they owe, the rates they charge, and the capital spending they need to make. And these are areas – banking, telecom, electricity, etc. – where governments feel intervention is more appropriate than in something like cork.

Also, in these countries – and I know that as a European investor you probably know this, but some Americans may not – you’ve got some publicly traded companies involved in things like lotteries, toll roads, gambling, etc. Those are all things a broke government can take away. In fact, they are the first things broke governments do take away. Unless you happen to have some oil fields, gold mines, or church lands handy – you’re probably going to consider breaking your promises about things like roads and lotteries. In a crisis, everything is renegotiable.

There are some additional disadvantages investing in these countries. If I can be completely honest – Greece, Spain, Portugal, and Italy were never near the top of my list of European countries I’d be interested in investing in. And the reasons have nothing to do with government debt. They have to do with business culture, political culture, and corruption. Now, I can get over any of those issues if I find the right business at the right price.

But if I were to make a list of the European companies I like best they would tend to be in:

· The U.K.

· Switzerland

· France

· Germany

· Scandinavia

Not Greece, Spain, Portugal, and Italy. Now that’s entirely unfair – grouping all Spanish businesses, all Portuguese businesses, etc., together like that. But it’s an issue of odds and effort. If every stock in Switzerland dropped 50% tomorrow there are companies I know and like there that would be cheap. It’s much easier for me to invest in a company I am already a bit familiar with than to start studying up on entirely new countries, new industries, and new businesses the very moment when these countries are making noisy headlines.

Maybe being in Belgium, you are already better prepared to look at companies in Spain, Portugal, etc. Maybe you are more familiar with them. I hope so.

If not, there is one thing you can do very quickly to start generating a list. You can go to the Financial Times screener.

I doubt the screener literally has every stock from the three countries you mentioned:

· Spain

· Portugal

· Italy

I know from past experience that the FT screener does not have perfect coverage of either the U.S. or Japan. Though to be fair their problem in those countries is clearly micro cap stocks.

Anyway, if you just tell the screener to show you a list of stocks in Portugal, Spain, and Italy with a P/E ratio greater than 1 and less than 10 – you get 102 stocks. That’s a big enough list to find lots of ideas. And it’s small enough to work through in a single weekend.

You don’t have to look into every stock. If the company is in an industry that is way outside your circle of competence, just move on. If you need to have some opinion on a specific commodity or something to know if it’s a bargain – skip it. There are 100 stocks on the list. All you need to do is find 1 in 10 or 1 in 20 that you think you might be able to figure out.

And even though I specifically mentioned being careful about toll roads, etc. you can look at those. You may not need to look at them too long. If you can’t figure out how safe they are – just move on. But the economics of a toll road are pretty simple. So if you can figure out their debt situation and how much they depend on having some agreement renewed or whatever – it shouldn’t be too hard to figure out the value of highways, airports, etc.

You can use the FT screener and Bloomberg together. When you type in a company name, Bloomberg shows you both the company’s market cap and its enterprise value. If debt scares you in these countries, pick a company where the enterprise value is almost exactly the same – or less – than the company’s market cap.

Within a few quick clicks you can find companies in food businesses with no debt. It didn’t take me long to find a capital goods company in Italy with a negative enterprise value (cash minus debt is more than the company’s market cap).

Sometimes I type in a company name and don’t really know if it’s safe or not. You need to track down longer term historical data. And you may want to stay away from businesses in industries you don’t understand or industries that are in decline – or facing a lot of change – like:

· Iberpapel Gestion

I mention a company like this because it’s something where I’d write the name down after seeing the data on Bloomberg. I probably wouldn’t be interested in the company because it’s not likely to be the kind of business I’m interested in.

But, according to Bloomberg it has more cash than debt. And enterprise value is just 3.3 times EBITDA. The price-to-book ratio is less than 1. The P/E ratio is in the high single digits (6 to 9 depending on whether we look forwards or backwards). The business description says they have forestry holdings in Argentina and Uruguay. It’s worth looking into.

I would scribble a name like that down and come back to it later. It’s probably not a good prospect. But on the stats alone, it makes the first cut.

If you want to, you can obviously check for negative enterprise value. Any time you find a company that trades for less than its net cash while still turning a profit – you should investigate. While the FT Screener tells me there are 9 negative EV stocks in Italy, Spain, and Portugal – many are not turning a profit right now.

I haven’t looked into it. But Bloomberg says:

· Danieli

Is a profitable company with a negative enterprise value that makes machines that are used to make iron and steel. Doesn’t sound like the kind of business I normally buy. I don’t know anything about the company. But they do show their financials – in English – for the last 8 years here.

Despite having a negative enterprise value, they aren’t exactly swimming in cash relative to total liabilities. But this is another one where I’d scribble the name down and go read the annual report later.

If you imagine everything in these countries has a good chance of being cheap – maybe you want to look for high quality companies instead of cheap stocks.

I ran a screen for companies in Italy, Spain, and Portugal with a 5-year average ROA of at least 10% and a 10-year revenue growth rate of at least 10%. I got a list of five companies. Two of them have a P/E over 20. Some of the others are in the apparel business. Not something I understand real well.

But you get companies like GEOX which basically meets a 10, 10, 10 requirement. Its return on investment is 10% or better. Its growth rate is 10% or better. And its P/E is (almost) 10 or lower.

However, they mention that they opened 130 new stores and closed 70 in the last 9 months. That business might be a little too tough for me to figure out. But it’s something where I’d definitely read the annual report. And Bloomberg gives the enterprise value to EBITDA as 4. That’s worth looking into. Although I doubt it’ll be a business where I can tell if it’s got staying power or not.

So, if you’re interested in investing in countries hurt by the debt crisis – I’d start with a list of Portuguese, Spanish, and Italian companies with no more debt than cash. Then I’d look for businesses I felt I could understand. Finally, I’d look for the cheapest stocks that met both those criteria.

Corticeira Amorim doesn’t meet the first criterion. It has debt. Now, I’m not saying you should stay away from all companies in those countries that have debt. Some of the companies carrying debt are TV stations, power plants, and telecom companies like Portugal Telecom. In those cases, the debt might be fine.

But, first I’d look for companies with no debt. After that, I’d go back and look at companies like Portugal Telecom where there is a lot of debt but – I’m assuming – you think the stock is still safe because of how predictable the business is.

For me, I’m sure that if I buy something in Portugal it won’t be Portugal Telecom. But that doesn’t mean it isn’t a good choice for you.

Having said that, I wouldn’t start by looking for the highest dividend yield. If you are going to buy Portugal Telecom, you should fill out some tables comparing it to maybe 5 or so other telecom companies in Europe and around the world. It is not the only cheap looking telecom company right now. I don’t want you to fool yourself into thinking the stock’s price is all about being in Portugal.

Comparing Portugal Telecom to other telecom companies around the world might also give you an idea of what kind of debt level is safe.

But if you haven’t at least skimmed a list of all the smaller stocks in Italy, Portugal, and Spain – you should do that first. Don’t focus in on one company too soon. Take some time to look at everything and see if there are any cheap stocks in industries you know well.

Read Geoff’s Other Articles

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About the author:

Geoff Gannon

Rating: 4.7/5 (22 votes)


Cdubey - 5 years ago    Report SPAM
Fantastic read, as always !
Marcolanaro - 5 years ago    Report SPAM
Really good article! I have been looking at a little known company in italy with lots of cash and participation in Monte dei Paschi di Siena which is one of the big banks and Generali which is an insurance company. It is a net-net in a lousy business, pubblishing. Its name? Caltagirone Editore
Rollling - 5 years ago    Report SPAM
About Portugal Telecom the problem is undoubtly the debt burden. I wouldn't go in at their current price at the moment. They have a big position in Oi (brazilian telecom) which is still revested in uncertainty since they are strugling to keep market share in Brazil. They do have some nice positions in African telecoms and the truth is that their future in the portuguese market doesn't leave me much doubt (growing and almost market leader in the TV and home internet 2 company monopoly business, and market leaders in the 3 company monopoly mobil phone business, which are wonderful businesses since people think of them as essential and many portuguese would rather save in food than there). However, taking debt and the doubts about their brazilian future I'd pass at current prices

About Corticeira Amorim, I went in at 0.94 reforced at 1.21 and 1.28 but left recently at 1.42. They just had a record year but after reading their last report they are facing higher cork prices and admitted they won't be able to pass on all of that price rise to customers. In adition they delayed some investments during the 2008-2010 period and naturally 2011 and further capital expenditures will be a bit higher than on that period. I wouldn't say they reached their fair value but maybe their potential isn't that high anymore (of course I might be biased because I bought in at a much lower price and the companies prospects aren't better than they were back then, but then I might be also biased in favor because it's a company based on my father's home village)
Filipercasilva - 5 years ago    Report SPAM
Hi, I'm Portuguese, although I moved out of the country 2 yrs ago. These companies weren't mentioned yer and I think they're very very interesting, as most of their business is done outside Portugal:

Portucel is Europe’s largest UWF paper producer, with a 19% market share. The company operates 3 BEKP (pulp) plants in Portugal, with two of them being integrated with paper. The company is vertically integrated, managing 136k ha of forest (self-sufficiency rate of 15%). It also owns a co-generation capacity of 240 MW. For 9M11 Paper represented 79% of sales, pulp & energy represented 10% & 11% respectively. The company is a low cost paper producer: as other paper makers are closing down capacity Portucel is operating at 100%.

The company has a market cap of EUR 1.4bn and has net debt of EUR 460Mn (Net Debt / EBITDA at 1.1x), which it is in the process of reducing (in 2010 it stood at EUR 687 Mn).

Portucel has 25% of its revenues in USD. Also sales are mostly outside Portugal.

The major share holder is Semapa, holding +/- 80% of the shares. Semapa is known for being a leveraged way to play Portucel, but they also hold a stake in a Cement company which hasn’t been doing very well.

Portucel is the low cost paper producer in Europe. Its plants are modern and efficient, which combined with vertical integration leads it to post the highest margins in the Industry (at least in Europe). The company is currently trading at a 14.3% FCF yield, with a dividend yield of around 11% and a PER of 7.5x.

The other interesting company, Jerónimo Martins (JM) operates supermarkets in Portugal (33% of EBITDA / 21% market share) and Poland (63% of EBITDA / 13% market share), and will start expanding into Colombia (yes Colombia) in the second semester. It is expanding aggressively in Poland, opening +/- 200 stores per yr. Because of the exposure to Poland they are also exposed to the Zloty (Poland’s currency), with a 10% change in the Zloty having a +/- 8% impact in EPS. Debt is low.

Personally I love going to JM’s stores in Portugal, and the quality of their products is excellent. Actually they have started using their own brand for most of the products (JV with Unilever), which gives them a higher margin and control.

I never bought shares of JM because they were always pricey... PE in the 20’s for most of 2006-2010. But shares just kept on going higher as they opened new stores in Poland. Every time I enter a JM store I beat myself for not having bought the stock yrs ago ... It is now the largest member of Portugal's equity benchmark index, the PSI 20.

Disclosure: long Portucel
Bernie2booty - 5 years ago    Report SPAM
Hi Geoff,

Really appreciate the response on my question. And I must say you make a lot of sense, but I just wanted to discuss a few points about the telco's.

There's a good interview with Bruce Greenwald: _ http://www.youtube.com/watch?v=jLomIjn5fro&feature=relmfu where he brings up a couple of interesting points about the telecom industry. My take-away is basically that while you're right about the fact that you can avoid texting and calling by using Skype etc, you'll still need the internet connection. So you have to buy that connection from the company that has the infrastructure, which is a very big upfront cost, to use all those free services and so you'll pay more because of your data usage. (That's the way it works in Europe, I don't know about the States).

If you look at the European telco's who have that infrastructure, there's France Telecom, Portugal Telecom, some company in Sweden (forgot the name). Those have basically made their investments in the previous years in FTTH (fiber to the home).

So perhaps that kind of telco is resembeling more a business like the big oil companies. Big investments in infrastructure for delivery of a commodity that is necessary, but not really much customer captivity?

Totally agree with your point about government interference, that's why I haven't made the investment yet.


Ps; sorry about the writing
Bernie2booty - 5 years ago    Report SPAM
Btw, could not help noticing Seth Klarman disclosed a holding in Vivendi, a French telecom. Although that could've been more of a sum-of-parts analysis.

Also, on your point of a possible euro break-up, I've always been told that in the case you hold stock in a country which currency is going to depreciate significantly, you want a stable company with a lot of foreign revenue and a lot of debt in that depreciating currency. I have no idea how the lawyers in Brussels are going to determine which euro-denominated debt is going to become Deutschmarks and which is going to become Drachmes or Lires, but if a company is domiciled in these south-european countries, my guess is that their debts will be in the countries' currency. I agree that this is a speculation, but this was also more of an afterthought when I looked at the company.

Personally, I try to learn as much as possible about different industries etc. and less about specific companies, so don't feel obliged to research the company specific.

As a final note, I have to thank you for your great reading material. For a young student who's really interested in the dynamics of business, your articles are great and a lot better than the more stockpitching ideas of some.

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