5 Solid European Value Stocks Investing Heavily for Future Growth

 | Aug 03, 2017 | 8:00 AM EDT
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As capital expenditures rise in Western Europe, opportunities could crop up for investors keen to diversify. According to a recent report by rating agency Standard & Poor's, companies in Western Europe are set to ramp up their capex after a "lost decade" for investment.

With the bull market still having 10 years to run (at least that's the opinion of a strategist speaking to The Street's Trading Strategies roundtable), finding underpriced companies that invest in growth could be a good way to try to beat ever-rising indexes. As always, deep research into these companies is needed to make sure value plays don't turn over time into value traps.

One way of identifying possible bargains is by using data from data provider FactSet to screen for European companies with annual sales growth exceeding 5% over the past five years, debt that is no more than 60% of common equity and forward 12-month price-to-earnings (P/E) ratios below the 15.2 of the STOXX Europe 600 pan-European index.

Limiting this universe to companies with market capitalization of more than $500 million narrows the search down. And because increases in capex are a sign of a company investing in its future, it's a good idea to look at the ones posting double-digit capex growth. (Of course, some investors will disagree, preferring companies that buy back stocks to those that invest in growth. To each their own.)

Finally, to make sure the companies can withstand headwinds in case of a downturn, it might be a good idea to limit the selection by choosing firms with a current ratio (assets to liabilities) of more than one.

The usual suspects immediately cropped up, five of which I covered in Wednesday's story. Here are five other stocks with high capex, low debt and good valuations that investors should consider:

Spanish oil company Repsol (REPYY) trades at a trailing 12-month P/E of just 10.7 in Madrid, where its main listing is. It's true that energy firms have faced a bit of rout over the past few years, to put it mildly, but this one could be an interesting opportunity if oil prices have indeed bottomed. Its 0.7 price-to-sales ratio also indicates Repsol might be a bargain. Repsol could make a good income play, too, with a dividend yield of 4.3%.

Svenska Cellulosa Aktiebolaget (SVCBY) (I know, good luck pronouncing that) is a forestry operator in Sweden  with five business units: forest, wood, pulp, paper and renewable energy. Year to date, the shares surged more than 46% on its main listing in Stockholm, but its P/E of a little above 8 and its price-to-sales ratio of just 0.5 still suggest this is a cheap stock. Its capex growth was around 27% in the last year, so perhaps some people are staying away because they believe this is too much capital investment.

The maker of Mercedes cars, Daimler (DDAIF) is another stock with potential, though investors should watch out for more Dieselgate-like surprises as an investigation into its alleged using of software to understate diesel vehicle emissions is not over. Still, Daimler's Frankfurt listing offers a juicy dividend yield of 5.4% compared with the 3.9% average of the STOXX Europe 600 index. Moreover, it's selling at a price-to-sales ratio of 0.4 and a P/E (in Frankfurt) of just a little over 6.0.

Sure, Daimler must upgrade all those diesel cars, and that will be costly. It might explain capex growth of more than 19%, but still, it looks right now like investors are getting a Mercedes for the price of a Ford.

Another Swedish company, construction giant Skanska (SKBSY) , is high on the list. The Stockholm-headquartered firm builds and renovates industrial facilities, infrastructure and residential buildings, so it is well-situated to take advantage of the construction boom in Europe.

However, its U.K. operation dragged it into a loss in the three months to June after the company took a £33 million ($43.5 million) hit on projects in Britain. On the flip side, Skanska has a price-to-sales ratio of just 0.5 and is trading at a P/E of 10.8 in Stockholm. Income investors might like this stock too, as it yields around 4.5%.

Finally, (for today at least), there is another Swedish potential bargain: Electrolux (ELUXY) . This manufacturer of major appliances is extremely well-known in Europe and invests heavily in development, with capex advancing by more than 12%, according to FactSet. Year to date, Electrolux shares have advanced by almost 24%, but it still looks cheap according to its price-to-sales ratio of just 0.7.

Electrolux's net profit jumped by more than 20% in the third quarter, when the company also said it saw strong demand coming from North America. The company is focusing on pulling out of less-profitable products and increasing efficiency.

There is a philosophical difference between investors who prefer companies that buy back stocks in order to improve their share price and earnings per share, and those who prefer corporations that invest in future growth. The former are probably more pragmatic, because nothing beats receiving money now.

But the latter are the kind of investors who encourage internal growth, innovation and exploration, which in turn boost economic growth. It would be good of all our sakes if the numbers of these investors were to swell.



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