This past weekend was the wife's birthday, so she was in charge of the social calendar. Naturally, we headed back to the coast and spent most of Sunday on the beach -- and, once again, I engaged in heavy anti-frolicking activity by catching up on the news of the week. One article that really stood out in my reading was the piece in Barrons on the likelihood of a sustained recovery in the European economy. If author Jonathan Buck is even close to correct here, this will have huge implications for worldwide markets and economies. The total European economy is bigger than that of either China or the U.S., and renewed demand from that continent could be huge for the global growth picture.
It is also good news for stock-pickers like me. I have a pretty strong presence in European equities. For some time now I have owned such financial names as Royal Bank of Scotland (RBS) and Aegon (AEG). The stocks have done OK, as money-printing has pushed many European markets, but both remain very cheap relative to book value. A sustained recovery across Europe -- even if it is a slow, grinding one -- could drive both of these stocks to a premium to book over time. The same will hold true for other cheap European equities, as well -- so I sat down this morning and ran some screens in order to see what I could find.
I started my search by looking for classic net-net stocks. These are stocks that trade for less than the value of net current assets, minus all liabilities. No value is assigned to any other assets, such as property, plants and equipment on the books. Generally speaking, companies can be liquidated for more the net current assets, so these are among the cheapest of the bargain issues. I also screened for companies that are located in Europe, but which are easily traded here in the U.S.
One name I turned up was Ireland-based Velti (VELT), which sells advertising and marketing solutions for mobile devices. Its Velti mGage platform allows corporations to conduct highly targeted mobile-based marketing campaigns. The company has had substantial cash-flow issues, even amid very rapid growth in the business, as many of its African and Eastern European clients have been notoriously slow payers. The company is now focusing future operations on companies with a shorter pay cycle, and which generate cash more quickly.
In the last quarter, 65% of Velti's revenue came from Western Europe and the U.S., so it is making progress. The company has market capitalization of $71 million and, according to the latest balance sheet, the net current asset value of the company is more than $77 million. Should we see a stronger European economy that generates higher levels for mobile marketing, this could be a substantial tailwind for the company and drive the stock back toward the double-digit price levels of a few years ago.
I have previously mentioned Natuzzi (NTZ) as super cheap stock. The Italian furniture manufacture is still seeing weakness in its European operations, so any strength on the continent would be a huge plus for it. Meanwhile, the company is currently enjoying strong growth in the Americas: Last quarter, sales were up 27% in that region, and sales rose 10% in the rest of the world outside of Europe. Total sales were basically flat year over year, however, with a more-than-20% drop in European sales.
On the cost-control side, Natuzzi recently announced a plan to restructure its Italian operations and to reduce its headcount by more than 1,700 employees. The plan has to be negotiated with the government and unions -- but, if a substantial portion of the plan passes, it will increase Natuzzi's margins substantially and position the company to benefit enormously from any recovery in the old-world economy.
The stock remains very cheap, as well. Natuzzi has $114 million worth of net current assets, and the market value of the stock is just $112 million. The total book value is more than 3x the current stock price, so the appreciation potential over the next few years is enormous. Before the economic crisis hit Europe, this $2 stock traded for more than $10. If the economy improves, it could easily do so again over the next five years.
I am by no means an expert on the European economy, but there some signs of improvement, and the European Central Bank seems determined to be as accommodative as possible. It may take five years, but a strong Europe is going to lead to some incredible wealth-building opportunities. Long-term asset-based value investors should consider trolling the continent for ideas and opportunities.