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Five picks from the PIGS

A few reasons for optimism have started to emerge from the troubled Southern eurozone economies, so we've gone on a hunt for value plays listed in Portugal, Italy, Greece and Spain.
December 4, 2012

The news from southern Europe has taken on something of a brighter hue over the past few weeks. Probably the most significant reason to be cheerful is the progress made with Greek bailout negotiations and the unveiling of a deeply discounted €10bn (£8.1bn) debt buyback plan. Meanwhile Spain has been given the green light to pump €40bn into its troubled banking sector. What's more, borrowing costs are falling in the eurozone's trouble spots, with Italy's borrowing costs recently hitting a two-year low. And recent PMI manufacturing data suggests there are grounds for hope that economies are stabilising in the eurozone as a whole.

Buoyed by these nuggets, we're searching for value plays among the eurozone's whipping boys. We're repeating a screen we ran in the summer for Irish stocks following some encouraging signs from that embattled economy. Our hunting grounds this time are the blue-chip indices of Portugal, Italy, Greece and Spain - the club of heavily indebted eurozone members that are often referred to as the PIGS, or PIIGS when Ireland is included.

The screen we've used is based on a watered-down version of the stock-selection criteria of American fund manager and value investor John Neff. Mr Neff's approach was to steer away from the risks involved with picking the very cheapest stocks on the market and instead to look for reliable companies that were being under-appreciated by the market.

To make our screen produce any results we've had to considerably soften our criteria compared with Mr Neff's original requirements. The most notable change is that our screen only requires earnings and revenue improvements over the most recent two financial years, which compares with Mr Neff's criteria of 7.5 per cent annual EPS growth over five years and revenue growth equivalent to at least 75 per cent of the earnings improvements, or 7 per cent.

Our PIGS screen criteria are as follows:

■ A PE outside the most expensive or cheapest quartile.

■ Forecast EPS growth.

■ Rising EPS over the past two financial years.

■ Rising revenues over the past two financial years.

■ Rising EPS in the most recent six-month period.

■ Positive free cash flow.

■ Finally, stocks must look cheap against Mr Neff's preferred measure of value, which was a PE-to-total-return ratio (PE/TER) where total return is long-term forecast EPS growth plus the historic dividend yield. This ratio needs to be less than 1.

Out of 155 stocks screened five passed all the tests. Four of the shares are listed in Italy and one in Spain.

  

PIGS PRIME CUTS:

Fiat Industrial

Commercial vehicle goliath Fiat Industrial (BIT:FI) is in the progress of taking on a far more international character than the one it is currently perceived to have. The group is pushing through a full merger with its 88-per-cent-owned US unit, CNH, which will see the primary listing of the enlarged company's shares move from Milan to New York. Investors hope the merger will help eradicate the discount Fiat shares have historically traded at compared with global peers, such as John Deere. Many attribute the relative cheapness of the shares to Fiat's complex holding-company structure. Meanwhile, recent third-quarter trading news was encouraging.

TIDMMarket capPrice
BIT:FI€10.1bn€8.26

Forecast EPS growthForecast PEDividend yieldPE/TER
42%       9.35 2.2%0.32

Source: S&P CapitalIQ

 

Tenaris

The uncertain economic outlook in the US and its impact on capital investment is hampering prospects for Italian pipe maker Tenaris (BIT:TEN). The company generates around two-fifths of sales from North America and there are signs of weakness coming from the region. Industrial orders in Europe are also suffering due to the torrid economic backdrop. But other markets, such as the Middle East and offshore oil and gas, look more promising. And the group is benefiting from attempts to sell more differentiated products and make efficiency savings.

TIDMMarket capPrice
BIT:TEN€17.8bn€15.12

Forecast EPS growthForecast PE ratioDividend yieldPE/TER
28%       12.8 1.9%0.72

 

Azimut

Italian fund manager Azimut (BIT:AZM) has been performing strongly in a tough market. The company has produced impressive growth in assets under management (AUM) by focusing on client needs and new product launches. In its recent third-quarter results the group pointed out that more than one-fifth of its AUM is in products that were launched since 2011. The group has also been expanding overseas through joint ventures and now plans to set up shop in South America.

TIDMMarket capPrice
BIT:AZM€1.3bn€9.98

Forecast EPS growthForecast PE ratioDividend yieldPE/TER
63%       10.9 1.0%0.86

 

Lottomatica

Lottery and gaming group Lottomatica (BIT:LTO) has been making progress despite trying conditions in its home market. The third quarter saw the group's Italian operation hit by a combination of unfavourable sports betting results and rising taxes - tax increases represent a risk for any company rooted in a country pushing through austerity measures. But the company has been producing impressive growth from its overseas lottery-operating business and its gaming technology arm. In fact, overall the current year is expected to come in at the top end of expectations on a constant-currency basis.

TIDMMarket capPrice
BIT:LTO€3.0bn€17.12

Forecast EPS GrowthForecast PEDividend yieldPE/TER
6%       11.8 4.1%0.91

  

Amadeus IT

Shares in travel technology company Amadeus IT (CATS:AMS) had enjoyed an exceptional run in 2012 up until last month. In part, recent weakness has been due to profit-taking following a strong set of third-quarter results. But the stock has also suffered following a botched trade by HSBC which has been left holding 5 per cent of the company. A large batch of Amadeus shares were meant to be bought by the bank and then quickly sold on. But the shares were not as easy to shift as anticipated, which led to a disclosure that the bank was sat on a large and unwanted stake. This has led to price weakness. This technical issue aside, there is much going for Amadeus. It has a broad geographic reach, operating in 195 countries, full-year sales are expected to be up more than 8 per cent, the group is winning market share and management has recently made the dividend policy more generous.

TIDMMarket capPrice
CATS:AMS€8.1bn€18.20

Forecast EPS growthForecast PEDividend yieldPE/TER
12%       13.7 2.0%0.96