Enel and LafargeHolcim Look Appealing for Value Investors
Markets fell on the ECB easing, pointing up the need for investors to be selective in choppy markets. Two opportunities: Enel and LafargeHolcim.
The Stoxx Europe 600 index’s one-day drop of more than 3% wiped out the previous month’s gains. Still, as Draghi himself insisted, investors might have missed the point that the ECB will be accommodative for the long haul. Katrina Dudley, a portfolio manager with Franklin Templeton’s Franklin Mutual European fund (ticker: TEMIX), sees the bright side of the central bank’s efforts. “The European recovery is still nascent, so it needs an accommodative policy going forward,” she says, pointing out that euro-zone inflation remains well below the ECB target of nearly 2%. The European Union said Wednesday that prices had risen only 0.1% in November from the level a year earlier, missing forecasts of 0.2%.
Still, Dudley cautions, “The days of blindly investing in stocks are a long way behind us,” and choppy markets have pushed investors toward safer, big-name stocks recently. “People are reluctant to move from low-yielding but steady investments, such as bonds because equities have been volatile,” she adds. “The disparity between growth and value equities is at its highest since the financial crisis.”
The good news: Investors willing to take some risk can find undervalued assets. Dudley likes well-run cyclical businesses, especially those that have restructured. She typically invests over three to five years. Her picks include Italian utility Enel (ENEL.Italy) and Swiss cement-maker LafargeHolcim (LHN.Switzerland).
ENEL HAS BEEN HURT by falling fuel prices and competition from renewable energy. Last month, it launched a strategy aimed at simplifying its structure and promoting growth. This includes taking full ownership of its Enel Green Power unit. It also promised to sell €6 billion ($6.53 billion) in assets. In fact, there isn’t a straight correlation between oil-price drops and electricity’s retail price. “Italian consumers are still paying for costs linked to decommissioning Italian nuclear plants decades ago,” she says.
Investec analyst Harold Hutchinson has Enel at a Buy with a €4.50 price target. The Green Power integration, he says, “has the advantage of bringing Enel’s main growth engine and its commercial culture under Enel’s full control.” He estimates that Enel’[s price/earnings ratio will be 13.3 this year, rising to 13.7 next year, before slipping to 11.4 in 2017. Its shares closed at €4.07 Friday.
LafargeHolcim was formed from the merger of France’s Lafarge and Switzerland’s Holcim, both of which were battling overcapacity and sluggish demand. The deal created a global giant with a market value of 33 billion Swiss francs ($32.93 billion). “LafargeHolcim is committed to generating free cash flow, has a revamped management team, and demonstrated it’s listening to shareholders,” Dudley says.
Vontobel analyst Christian Arnold rates LafargeHolcim Hold with a CHF60 price target. The company faces demand issues in key markets, particularly in China, but he “believes in upside potential beyond 2018 targets, thanks to a market-growth recovery and further cost optimization.” LarfargeHolcim shares closed at CHF52.50 Friday.