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Rupert Hargreaves
Rupert Hargreaves
Articles (926)  | Author's Website |

4 European Deep-Value Ideas

Hunting for value across the Atlantic

July 23, 2019 | About:

In the past, I've written a few articles looking at deep value stocks in the U.S. But the U.S. market is only a small section of the global capital markets, and there are tens of thousands of companies outside the U.S. for investors to consider.

Europe is particularly appealing because it has similar rules and regulations to the U.S., unlike companies listed in Asia, Africa and South America.

This being the case, let's look at European equity markets to see if we can find any deep-value equities for investors in the current market environment.

For the purposes of this exercise, I am looking for stocks with market capitalizations of more than $50 million and price-to-net-working-capital values of less than 1.

Undervalued telecoms

The first company that has come across my radar is French telecoms group Parrot SA (PARRO).

Parrot SA is an international designer and producer of telecommunications equipment and recently was selected by the U.S. Department of Defense to take part in its development of the next generation of short-range reconnaissance drones for the U.S. Army.

The company clearly has some valuable technology, and this is where its value lies. Even though revenue has more than halved over the past five years, its drone business is booming.

For the first quarter of 2019, revenue from commercial drones and solutions increased 26% to account for 66% of revenues, up from just 43% in the same quarter last year.

As the drone business continues to expand, Parrot's top line could return to growth. The company has plenty of financial firepower to fund its turnaround. At the end of 2018, Parrot had a net cash balance of 160 million euros, and book value per share was 5.56 euros. At the current share price, the stock is trading at a price-tangible book value of 0.6, and it has a negative enterprise value.

Cash cow

Another European business that is currently trading at a significant discount to its assets is Autostrade Meridionali (AUTME). This company owns and maintains a specific section of motorway in Italy -- the highway A3 Napoli-Pompei-Salerno to be exact. It also maintains traffic signs, station buildings and parking spaces along the route.

Earnings have multiplied over the past six years, with net profit increasing from 2.8 million euros to 21 million euros for 2018. Book value per share has grown at a compound annual rate of 9% from 25 euros to 38 euros between 2013 and 2018.

At the current price, the stock is trading at just 80% of value, and the company has a net debt balance of 191 million euros, which gives it a negative enterprise value of around 60 million euros.

Autostrade distributes quite a significant portion of earnings to shareholders via dividends. The current dividend yield is 4.8%, and the stock trades at a historical price-earnings ratio of just 6.

The low price-earnings multiple coupled with the discount to book value certainly makes this highway operator an exciting opportunity in the widely overvalued global equity markets.

Pharma buys

Two other companies that are also trading at significant discounts to book value, but don't have any substantial revenue, are Erytech Pharma SA (NASDAQ:ERYP) and Avantium NV (AVTX). Both of these businesses are early-stage pharmaceutical companies.

They are dealing at a price-book value of around 0.7 and Erytech Pharma SA has net cash on the balance sheet of 133 million euros, while Avantium NV has 83 million euros. On this basis, both companies are also trading at negative enterprise values.

Disclosure: The author owns no share mentioned.

Read more here: 

Valuing the Firm Versus Valuing the Equity 

Warren Buffett: Looking for Businesses We Can Be Sure About 

Placing a Value on Financial Stocks 

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

Visit Rupert Hargreaves's Website


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