5 European Big Spenders Promise Future Growth

 | Aug 02, 2017 | 10:00 AM EDT
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With companies in Western Europe set to spend again on new projects, equipment, buildings and more, investors should rejoice. If capex is rising, it means the recovery is becoming entrenched.

The eurozone economy expanded at the fastest pace in six years in the second quarter, by 2.1%, according to data released Tuesday, Aug. 1. And while some investors worry that this means the European Central Bank will taper its unprecedented bond purchases, ECB President Mario Draghi has made it clear any tapering will take place at a snail's pace.

European companies look more attractive than U.S. firms right now because monetary stimulus is still on, plus some of them might be cheaper than similar U.S. stocks.

So, let's take a look at the biggest spenders in the global corporate capital expenditure survey for 2017 released earlier this week by Standard & Poor's to see how attractive they are to investors. The first three companies are in the energy sector, a sign that the woes in this field might be nearing an end.

Energy giant Royal Dutch Shell (RDS.A) , (RDS.B) is top of the list, with $22.1 billion in capex at the end of last year. With oil prices seemingly finding a floor, this stock does look like a good place to park some cash, as it is also one of the top dividend payers in the world.

Royal Dutch Shell's profit more than tripled to $3.6 billion in the second quarter, beating consensus estimates of $3.1 billion. Still, the stock looks very expensive at a trailing 12-month price-to-earnings (P/E) ratio of more than 30 on the London Stock Exchange compared with a 22.3 P/E for the STOXX Europe 600 index.

A fire last week at Europe's biggest refinery in the Netherlands caused a power outage, forcing the company to shut all operations there, which it plans to restart in the second half of this month.

Next up is Total (TOT) , the French energy company. It spent $18.1 billion on capex last year, which makes it Europe's second-largest spender. The company's adjusted net income increased by 14% in the second quarter from the same period a year ago, to $2.5 billion. This one is relatively cheap, as its Paris-based shares currently trading at a P/E of 14.5.

Third in line is BP (BP) , with capex of $16.7 billion. On Tuesday, BP shares traded at the highest level in more than a month as the company returned to profit in the second quarter due to higher oil prices.

BP is taking a step toward the electric car future by talking with various manufacturers about installing battery recharging points at its existing stations, company CEO Bob Dudley told Reuters.

Perhaps unsurprisingly, the fourth-largest European spender on capital investment is Volkswagen (VLKAY) . The carmaker, which was hit badly by an emissions scandal, spent $13.8 billion on capex last year.

Volkswagen's profit increased by 3.7% to €4.55 billion ($5.36 billion) in the second quarter, and management slightly raised full-year sales guidance to say sales will increase by "more than" 4% compared with a previous guidance of "up to" 4%. On the Frankfurt stock exchange, the shares trade on a trailing 12-month P/E of just 10.8.

The fifth big spender in Europe is another energy firm, Statoil (STO) , the Norwegian oil company, with $12.2 billion in capex last year. The company's adjusted net earnings came in at $1.29 billion in the second quarter, exceeding expectations of around $1.03 billion.

More importantly, Statoil's CEO said the company can cover investments and dividends if world oil prices were $50. That's a good adjustment from three years ago, when it needed oil prices of around $100.

The fact that four out of the top five capex spenders in Europe are energy firms shows that companies in the sector are doing all they can to fight disruption from renewable energy and electric cars, as well as lower oil prices. It's hard to tell who the long-term survivors will be, but investing in finding alternatives sure helps.



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