Five Irish recovery plays

More than any other bailed-out economy, Ireland has taken its medicine. But it's not completely out of the woods; as an export-oriented economy, it's exposed to slowdowns in the UK and the eurozone, and as a member of the single currency, it cannot set its own interest rates or devalue its currency. Unemployment is high and house prices have collapsed.

Still, with the ISEQ stock index up 35 per cent since last September, we felt the Irish market was worth a closer look. To identify some promising companies, we used a John Neff screen. Mr Neff is a highly respected but low-profile value investor who established one of the best track records on Wall Street during his 31-year stint at the helm of the Vanguard Windsor fund. His approach was to hunt for high-quality companies that the market overlooked because they were not considered exciting enough.

Ireland's stock market is small - we only had 48 stocks to screen - which has meant we've needed to relax some of Mr Neff's criteria in order to generate results. The starting point of the screen is to exclude all shares with valuations among the lowest quarter of PEs as well as those among the highest quarter. The remaining stocks must then meet at least five of the following six criteria:

We've found five shares that pass the test, most of which offer a blend of international growth potential and the prospect of a recovery at home.

United Drug

Pharmaceuticals services business United Drug should benefit from three key industry trends: more use of outsourcing, consolidation in supply chains and the rise of generic drugs. Its traditional markets in the UK and Ireland are weak, but managers have sought to diversify the group geographically to counter this; in the first half, over 70 per cent of underlying profits come from outside Ireland - including a quarter from North America. The valuation looks far from challenging and there should be the potential for a re-rating should growth prospects start to overshadow troubles at home.

Source: S&P CapitalIQ

Glanbia

Dairy and nutritional ingredients group Glanbia is pursuing a similar strategy. Its traditional dairy operations in Ireland are struggling, but its international nutrition business is producing strong results, especially in sports nutrition. Analysts at stockbroker Goodbody think the international operations will overtake the Irish business as the main generator of revenues this year, something that could help drive a re-rating. Any improvement in the Irish economy should help the traditional dairy business and could also aid restructuring.

CPL Resources

Weak growth and high unemployment are bad news for recruitment groups like CPL, Ireland's largest such company. In its favour, though, the group has attractive positions in niche markets and its balance sheet is strong, allowing it to return €20m to shareholders through a tender offer last year. The only real catalyst for a re-rating here would be an improving economy and rising employment; a year-end trading update last month provided some grounds for encouragement, but the outlook remains extremely uncertain.

Origin Enterprises

Origin has a good long-term story to tell investors, given the demographic pressure on food supplies. The group generates almost two-thirds of its profits from its food science consultation business, which helps farmers increase crop yields. Some noteworthy successes with UK cereal crops in recent years have helped it prosper and the group may start offering its services in eastern European markets. The other third of profit comes from the more mundane business of supplying fertilisers and other agricultural products. ARYZTA, a Swiss baking giant, owns a 72 per cent stake in Origin.

Ryanair

Ryanair shares trade in London, too, and the budget airline is probably the most familiar of the four companies we've unearthed. Famous for its ability to control costs and extract yet more revenues from passengers, it should be a beneficiary of distress among Europe's flabbier carriers and the inevitable reductions in capacity. It'll also benefit from lower fuel prices if oil continues to drop. Although it recently guided expectations lower, it has a habit of beating forecasts and also pays occasional special dividends - a 34-cent payout is due in November. The group is currently making its third attempt to buy lossmaking flag-carrier Aer Lingus with a cash offer worth €694m. Last IC view: Hold, 394c, 21 May 2012