Global Correction Looming
Although our main scenario remains for a significant correction in global equity markets in the coming weeks, managing money is about being disciplined and respecting Technical signals.
Numerous elements are pointing to the coming correction. The final breakdown in the US Tech mega caps or Tesla shares, vertical acceleration in a number of cyclical sectors, growing divergences in breadth, significant reversals in markets like Tawain and Japan are all sending signals that volatility lies ahead.
Even European indexes marked a peak last week and are setting the stage for the coming correction.
We are fully positioned for what is to come in our Model Portfolio.
Nevertheless, there are interesting situations in Europe that deserve attention and justify investing on the own merits of the stocks…
Many European companies are reporting their Q1 2021 earnings this week and the outcome is globally very positive. Moreover, when individual stocks rise when the global indexes they belong to fall, it is a sign of relative strength that usually indicates further strength in the future.
We also expect European stocks to be the best performers in relative terms in the second half of the year and this is why we do not hesitate to continue building our exposure on a company by company basis.
We have added these positions to our Model Portfolio today.
BUY Commerzbank AG CBK GR @ 5.96
Commerzbank posted a surprise profit in the first three months and upgraded its full-year revenue outlook, providing support to Chief Executive Officer Manfred Knof after he unveiled a new turnaround strategy to boost profitability.
Revenue soared 35% in the first quarter after the bank joined peers in profiting from strong trading and investment banking conditions. That helped drive net income to 133 million euros ($161 million), compared with a forecast loss of 53 million euros. Full-year revenue should be slightly above that of 2020, compared with earlier estimates of a decline.
The bank benefited from an increase in net commission income in the quarter, while a 126 million-euro benefit from the European Central Bank’s targeted longer-term loan program helped offset pressure on net interest income.
Commerzbank’s 1Q report is the first tangible evidence of success in the lender’s multiyear turnaround efforts, with across-the-board beats to revenue, costs and impairments.
Revenue was especially encouraging, notably in the retail bank (strong securities business, lending), but also in capital markets within the corporate bank, underpinning the raised full-year guidance (to above 2020’s level). Another heavy restructuring charge will weigh on 2Q, but the 2% underlying year-over-year decline should prove sustainable, given headcount reductions.
Technically, the 2018 / 2020 bear market is over and the bank’s turnaround will capitalise sharply on the German and European economic recovery.
Analysts are busy revising their ratings and targets upwards. The next target for the stock is 7.20 followed by 8.
BUY Fresenius SE & Co. FRE GY @ 42.56
Fresenius SE & Co KGaA is a global health care group with products and services for dialysis, the hospital and the medical care of patients at home. The Company sells dialysis, infusion, transfusion, and diagnostics equipment and systems, blood separators, plasma, hemofilters, nutritional liquids, and solid and liquid pharmaceuticals.
Fresenius offers a wide range of dialysis and infusion products and services through its four core business segments, which operate as legally independent entitites: Fresenius Medical Care, Fresenius Kabi, Fresenius Helios, and Fresenius Vamed. The company’s Medical Care division specializes in treating chronic kidney failure in almost 4,000 dialysis clinics worldwide. Fresenius Kabi provides nutrition, infusion, and IV therapies and related equipment. Fresenius Helios operates private hospitals in Germany, while Fresenius Vamed offers facility management, project development, and other services to hospitals and health facilities. Fresenius has operations in more than 100 countries.
Medical Care serves almost 350,000 patients via a network of upwards of around 4,000 clinics. Its production sites, found on every continent, provide dialysis products (machines, dialyzers, and disposables).
Fresenius Helios runs some 110 hospitals (including about 90 acute-care facilities and seven maximum-care hospitals) with more than 35,000 beds in Germany.
Fresenius Kabi produces IV drips and other infusion and nutrition devices.
Fresemius Vamed provides project development, planning, technical and operation management, and turnkey construction services to hospitals and other health care facilities around the world.
North America is Fresenius’ largest market at more than 40% of total sales.
Europe follows with almost 45%, while the Asia/Pacific region (more than 10%), Latin America (5%), and Africa account for the remainder.
The company’s 90 or so production sites are located in the US, China, Japan, Germany, and Sweden. The company also has production facilities in other European countries and in Latin America and South Africa.
Fresenius reported Q1 earnings slightly above expectations while giving guidance for a mid to high single digit growth in sales with 13 % increase in net profits.
Technically, the 2017 -2020 bear market in the stock price is over having corrected 61 % of the previous 2009 2017 bull market. The bottom is solid and we expect the shares to benefit form the global rotation from growth to value and from the US to Europe in the second half of the year. We have a target at 52 and then 58.
BUY Deutsche Telekom AG. DTE GY @ 16.50
Deutsche Telekom is finally getting out of its 20 years slump and we expect the company to start a new and significant up leg with a target at 25.
Deutsche Telekom just increased its financial forecast as the Sprint Merger starts delivering results. The U.S. unit T-Mobile is riding high after merger with rival carrier Sprint while the German parent is still feeling the drag from pandemic lockdowns in Europe.
Deutsche Telekom AG’s U.S. unit made the most of its dominant position in 5G mobile services, helping the German parent company to beat earnings forecasts.
Adjusted earnings before interest, taxes, depreciation, amortization and after leases were 9.2 billion euros ($11.2 billion) in the first quarter. That beats the 8.75 billion-euro average estimate from analysts.
The company raised its forecast for group as a whole. The forecast increases partly reflect expectations for a better performance outside the U.S., where the company now sees free cash flow after leases of around 3.6 billion euros, up from 3.5 billion euros.
Tough lockdown measures in Germany since a resurgence of Covid-19 have held back Deutsche Telekom’s mobile service revenue, which slipped 0.8%. It nevertheless attracted 10,000 more German customers for fiber broadband than it did in the same period a year earlier.
In the U.S., T-Mobile US Inc. merger with Sprint Corp made it the no. 2 provider of wireless services in the country. T-Mobile last week topped earnings estimates and boosted its subscriber forecast, a sign the carrier is exploiting its lead in 5G.
T-Mobile US now expects synergies from the Sprint deal of $2.8 billion to $3.1 billion in 2021, a $100 million increase from previous expectations.
The parent’s division offering IT services to corporate clients continued to struggle, with revenue dropping 4.4% in the period to 1 billion euros.
Net profits should increase by 18.7 % in 2022, supporting a phenomenon of valuation expansion, as Europe comes out of the pandemic lockdowns and 5G is rolled out more aggressively.
BUY Bayer AG BAYN GR @ 55
We re-instated our position in BAYER AG as the stock is starting to break out of the extended consolidation triangle in place since February.
Today, Bayer AG reported higher-than-expected earnings thanks to a recovery at the crop science division that has dogged the company since its controversial takeover of Monsanto in 2018.
What has been a liability for the stock over the past two years is now starting to deliver the expected results.
The German company posted first-quarter core earnings of 2.59 euros a share, exceeding the 2.31-euro average estimate. Sales also topped estimates, and Bayer confirmed its previous full-year forecast.
The farming unit, which had struggled early in the pandemic, is now seeing business pick up amid the highest commodity prices in eight years. The recovery is being driven by Latin America and Asia, particularly in herbicides, fungicides and vegetable seeds.
Bayer also announced developments in its Roundup herbicide litigation, saying that 96,000 current lawsuits in the U.S. are now either covered by settlement agreements or failed to meet eligibility requirements for the resolution program. That is up from 90,000 suits falling under those categories as of late February, with the company pledging to resolve the remainder, according to the statement.
The company has agreed to pay as much as $11.6 billion to resolve existing Roundup lawsuits from about 125,000 consumers and farmers in the U.S. and yet-to-be filed claims. The litigation has been a lingering obstacle for Bayer, with more lawsuits filed almost daily.
On May 19 2021, U.S. District Judge Vince Chhabria may rule on an updated framework that would govern future suits claiming that Roundup causes cancer. Chhabria rejected a $1.25 billion proposal last summer, and Bayer and plaintiff attorneys have since floated a new plan worth as much as $2 billion. Bayer insists the product is safe.
Bayer’s two other divisions showed less growth compared with a year ago.
Like some of its rivals, the pharma division has suffered from weak demand during the pandemic as people delay non-essential medical procedures. But it’s now seeing a recovery in some medicines, including eye treatment Eylea, ordinarily a growth driver.
The consumer health division is experiencing a slowdown as Covid-fighting measures like face masks and lockdowns result in little need for people to buy cough and cold medicines. .
With the return to more normalcy and the fading away of the litigation risks, Bayers’ businesses should recover strongly in 2021 and 2022, with EPS rising by 79 % in 2021 to a new all-time high and growing again by 11 % in 2020.
Sustained high commodity prices in the new commodity super cycle should provide a strong growth driver
Technically, Bayer’s shares are down by almost half since the $63 billion acquisition of Monsanto in 2018, and 65 %b since its peak of EUR 140 achieved in 2015. The bottom recorded at EUR 40, levels last seen in 2007 and 2012, is extremely solid and the stock is finally breaking out of the extended downtrend in place since 2017.
Our next targets are 67 and then 80
BUY Carrefour SA CA FP @ 16.50
After decades of underperformance, the French leader in food retailing is finally turning the corner.
Carrefour released good earnings for 2020 and its guidance for 2021 was even stronger.
There is more and more evidence that Carrefour — after almost two decades of prevarication — has taken action on price, assortment and costs to improve its appeal to consumers, as shown by a French NPS (Net Promoter Score) improvement of 30 points since the plan began.
Gains in volume sales, including a recovery in long-lagging non-food, could begin to drive more operating leverage in the country, which would confirm margin passed a low point in 2019. Such actions need to matched across Europe.
The strategy to build a strong online presence seems to be working, with online food up 56% in 1Q, including 51% in France. This is reversing a long period of under-investment in the channel and helping to build market share.
Wholesale Promocash was hurt by restaurant closings during the Pandemic but a return to normalcy should see this business segment grow strongly in 2021 and 2022 as restaurants start opening again.
Carrefour is aiming for 1B EUR in free cash flow this year, which makes the stock cheap.
Between now and 2023, Carrefour expects to cut costs to the tune of 2.4B EUR per year.
EPS grew by 31 and 37 % respectively in 2019 and 2020, showing that the turn around strategy is working and net profits should increase by 6 and 12 % in 2021 and 2022, pushed by international expansion.
Carrefour announced strong first quarter sales that reached 18.56 billion euros, marking like-for-like growth of 4.2% and reflecting robust food sales in key markets of Brazil, France and Spain.
Carrefour also announced plans to buy back shares for the first time in a decade, showing confidence in its turnaround plan after a strong first quarter.
Technically, Carrefour shares are turning the corner after years of bear markets and should be starting a new secular bull market as the business fundamentals improve. At current levels, the shares are cheap and can be expected to go through a lasting phase of valuation expansion.
Our next targets are 21 and then 32.
BUY Orange SA ORA FP @ 10.38
The French leading telecom operator has been a dead duck for the best part of the past decade.In 2020, and the is before the pandemic, the stock lost 50 % of its value and has now build a solid bottom and a solid base.
Orange offers one of the best midterm cash-flow growth profiles among European carriers, with an improving top line, cost cutting and declining capital expenditure. That brings potential for modestly higher-than-expected organic cash flow in 2023, almost 60% above 2020.
This, together with asset-monetization opportunities amid moderate leverage and M&A discipline, leaves room for healthy dividend growth.
Nevertheless,Orange struggles in Spain (11% of sales), where stabilization won’t be seen before 2022. A potential consolidation and earlier-than-expected financial turnaround in Spain may improve the sentiment notably.
Orange’s potential interest in TDF Group, as recently eported by Les Echos, looks justifiable if the company can focus on tower and fiber operations (59% of sales), while leaving out the declining broadcasting unit (41% of sales).
An acquisition would bring around 6,420 active tower sites and 500,000 fiber sockets. This would help consolidate the crowded French tower market, boosting Orange’s towerco valuation, while modestly improving Orange’s fiber coverage.
TDF could be valued at about 5.4-6.2 billion euros, based on 390 million euros of after-lease Ebitda in 2020 and a 14-16x multiple range. Orange can afford an outright purchase, but its low 1.8x leverage could jump by 0.4x with a debt-financed acquisition, given TDF’s 3.9x net debt-to-Ebitda.
Strong cash-flow expansion and asset monetization opportunities can allow Orange to deliver better-than-expected shareholder remuneration, we believe. The company’s 40-60% targeted ramp up in telecom organic cash flow (OCF) by 2023 vs. 2020 is the strongest among European peers after Iliad.
The outlook for Orange’s midterm cash-flow generation is making the prospect of robust dividend growth more likely, with management projecting a 40-60% increase in 2023 vs. 2020, one of the highest in the industry.
An improving top-line expansion, a focus on costs, and moderation in capital expenditure with fiber roll-out progress and network-sharing deals support the goal.
Orange’s new commitment to a 1 billion-euro net cost-savings target for 2020-23 and investment into business with the 2.2 billion-euro tax reimbursement can make up for the operational challenges.
Management aims to achieve the upper half of the 3.5-4 billion-euro target range in 2023.
Orange’s current M&A focus is limited to a potential acquisition of a 40% stake in the Ethiopian state telecom company, Ethio, which according to our analysis, could cost about 1 billion euros, or 4% of net debt.
Orange EPS should grow by 21 % in 2021 and another 9 % in 2022, making the stock cheap considering its 5.74 % dividend yield with strong probabilities of dividend increase.
Technically, the stock has put in a significant bottom and formed a saucer cup pattern it is about to break out from.
Our next Targets are 13 and then 16