As earnings season delivers a mixed picture, Europe has become a fertile hunting ground for stock pickers, says Martin Todd, co-portfolio manager of the Hermes Sourcecap European Alpha Fund.
Europe remains on the slow road to recovery despite the recent negativity. Compounding the gloom amongst investors is the ratcheting up of event risk. Brexit is looming largest, driving down sterling and threatening a period of sustained instability. Equities also potentially face a supply side shock as oil-backed sovereign wealth funds may be forced to continue offloading equities if the oil price stays low or even deteriorates.
However, the unremitting gloom is masking pockets of optimism. While some earnings have disappointed, there has been a raft of companies still managing to beat estimates. Macro headwinds will persist for some time as the region has ripened for stock pickers.
We continue to forensically analyse stocks, selecting those firms benefiting from structural growth themes, as well as domestic European cyclical names on inexpensive valuations that have the ability to pull cost levers to sustain profitability.
Pharma giants face stiff competition headwinds and pricing pressure in major markets. However, following restructuring, a deal with Novartis and shareholder pressure, GSK is seeing the first tentative upgrades to earnings-per-share (EPS) forecasts in four years. Despite lower profits, the company presented a bullish case for future annual revenues combined with increased cost efficiencies – GSK plans to save £3bn by the end of 2017. Double-digit EPS growth is expected in 2016 with 6% dividend yield.
Following a period of struggle and re-structuring, Adidas is stretching its legs. Optimism over new product development has been buoyed by better-than-expected results across all regions. Sales have risen strongly driven by double-digit percentage growth in Western Europe, China, and Latin America. The company upgraded earnings forecasts to 10%+ in top and bottom line growth.
Merlin Entertainments has delivered strong results following a summer of discontent in the wake of the Alton Towers accident. The outlook is optimistic with an increase in 2020 organic targets. Overall robust performance was helped by new openings and a growth in like-for-like sales.
Dutch bank ING Group declared pre-tax earnings of 11% ahead of consensus and a stronger capital position – at 13.4% versus the 13% Common Equity Tier 1 consensus. The company also announced a 6.7% dividend yield with management targeting a growing future dividend.