German Equities

How to pick a winner

Symrise AG
Which to pick? The stock of flavor and fragrance producer Symrise is one to watch. Source: dpa

Stock prices in Germany and elsewhere have experienced a long recovery over the last several years – but that doesn’t mean it’s time to give up on them. Germany’s blue-chip DAX index has more than tripled since its low point in 2009 to reach a record close of 13,478.86 on Friday, while smaller companies in the MDAX are also doing well. In addition, corporate earnings are now finally catching up with the increased stock prices and a booming world economy promises strong gains to come, especially for export-oriented German companies.

Interest rates, meanwhile, have already started to creep up in the United States and Britain, and mainland Europe may soon follow. But they remain at historic lows, making fixed-interest alternatives still far less interesting than shares for investors. Bonds from BASF, BMW, Daimler or Deutsche Telekom are yielding less than 1 percent, while the shares of these companies have a dividend yield of 4 percent and more, not counting further possible capital gains.

Central bank liquidity may have boosted stock prices in the past few years, but it is company earnings that drive the share price in the long term, and that basic principle is reasserting itself. What this means for investors is that they have to pay more attention to the fundamentals in each company and pick those stocks with the best earnings potential rather than just investing across the board. So where to look?

“After years of stagnating corporate earnings, there is a new dynamic that should help the stock market this year and next,” said Christian Kahler, chief equity strategist at DZ Bank. “We are experiencing the longest stock market upswing in the history of business. To wait for the crash for that reason would be an expensive mistake because conditions for the economy and stock market continue to be very positive.”

The key is to look at price-earnings ratios to find stocks that are historically undervalued or only modestly valued. This can be true of stocks that have shown sharp gains recently, as well as those that have lagged the market because of specific concerns. On this basis, Handelsblatt has identified several stocks – from blue chips like Daimler and Lufthansa to lesser known OTC issues – that appear to have considerable upside potential. Of course, stocks are always risky and the best protection is to diversify holdings.

“After years of stagnating corporate earnings, there is a new dynamic that should help the stock market this year and next.”

Christian Kahler, chief equity strategist, DZ Bank

A prime example of how stocks can be trading well below their value for temporary reasons is the Dürr automotive equipment company. The firm has a 50-percent market share globally for auto-painting equipment. But by 2009, the stock price had plunged 80 percent to just €7.26, not because the company was bankrupt but because no one was ordering new painting equipment. But when that market turned around just four years later, the stock shot up to €80 as pent-up demand and a strong presence in growth markets like China, India and Brazil propelled sales and earnings. Timing is everything. Family head and board chairman, Heinz Dürr, made a tidy profit speculating on his own firm’s stock.

Dürr is listed on the MDAX, one of the “minor leagues” in German stock indexes. But there are actually good opportunities among the blue-chip DAX stocks as well. While the DAX has more than tripled from its low point in the spring of 2009, the MDAX has more than quintupled, so many of those stocks have less catching up to do.

One of the DAX stocks, auto-parts supplier Continental, has seen its stock price skyrocket by a multiple of nearly 20 to €222, but still has upside potential. Historically specialized as a tire maker, Continental has diversified into other automotive sectors and smart investing has put it ahead of the curve. Over the past five years, for instance, the company has invested €1 billion ($1.16 billion) in electric powertrains and is well-positioned for the dramatic shift in the industry to e-mobility.

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Stock in Mercedes-maker Daimler also has upside potential. Source: Reuters

Deutsche Lufthansa and Daimler, on the other hand, have lagged the index due to concerns about their sectors. Worries about overcapacity in European airlines has depressed Lufthansa’s price-earnings ratio to just 7.45 even as it is on course for record earnings. It acquisition of Air Berlin’s top assets and continued low prices for jet fuel are now boosting the price. Lufthansa’s position looks stronger as rivals like Emirates, Etihad and Turkish Airlines lose ground.

Daimler is selling more Mercedes cars than ever and racks up one record profit after the other but the stock price has fallen 20 percent from two and a half years ago as investors worry about the emissions scandal and collusion suspicions that have hit German carmakers. But Daimler has considerable resources – earnings will reach almost €10 billion this year and the company employs 290,000 around the world – to overcome its obstacles and keep up with the competition.

Meanwhile, the only media stock in the DAX, ProSiebenSat.1, has lost a third of its value since April as its audience continues to decline. But its return on capital is 35 percent, giving the company plenty of room to undertake the necessary restructuring.

03 p53 DAX Lagging Behind-01

On the MDAX, highly specialized companies such as cable supplier Leoni, fragrance producer Symrise, and machine maker Jungheinrich are all export-oriented, and realize the majority of their sales abroad. On the domestic front, real estate stocks like Deutsche Wohnen and Grand City Properties, which joined the MDAX last month, are benefiting from the demand for housing and low interest rates. Nemetschek, which provides software for construction companies, is headed for a record year. It is listed on Deutsche Börse’s Xetra trading platform.

Other innovative companies include drug research firm Evotec, which saw its stock quintuple before it recently gave up 20 percent. But after cementing alliances with several major drugmakers the company is forecasting a sales gain of 40 percent this year and EBITDA (earnings before interest, taxes, depreciation and amortization) up more than 50 percent. Dialog Semiconductor supplies Apple iPhones, so its fortunes rise and fall accordingly. But it’s hard to bet against the iPhone.

These are some of the highlights among German stocks with potential. There are no doubt others for those carefully winnowing through the choices. Take your time, then take your pick.

Ulf Sommer covers the stock market for Handelsblatt. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the authors: sommer@handelsblatt.com and d.delamaide@extern.handelsblatt.com.

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