EQUITY STRATEGIST, BARCLAYS WEALTH
Key investment themes in Europe include the likely increase in investment as the global recovery gathers steam, and the probable revival in mergers and acquisitions. These three stocks – in the technology, oil field services and electronics and engineering sectors – look particularly well placed to benefit from these two trends.
German software supplier SAP offers “collaborative business solutions” that are already used by 12m people. The firm has plans for organic growth through strategic acquisitions. Having held back on spending for a long time, firms across the global economy must now reinvest in IT. SAP’s recent results produced a positive share price reaction and although the American part of its business continues to drive growth, European operations are recovering. SAP’s dividend has been increased, and the firm is talking about 10-14 per cent revenue growth in 2011. Our fair value for the share is €46.
Technip, the French oilfield services firm, also looks set to benefit from greater corporate investment as the economy recovers. There are signs of an increase in exploration capex spending, and the company already has a strong order with contract wins accelerating. The firm is well-diversified across segments and geographies, and its vertically-integrated business (with some in-house manufacturing) allows it to achieve margins above peers. Its strong net cash position should also enable it to add value through bolt-on acquisitions. Despite sector outperformance in 2010, we believe the shares still have further to go, and our fair value for the stock is €84.
Siemens is an attractively-priced business group in electronics, engineering and power. Siemens is on track for in line revenues and an increase in net profits year-on-year in the first quarter of 2011, driven by a strong order book and tendering on some large contracts. Additionally, acquisitions enhance the group’s appeal, while exposure to emerging markets supports our (above sector) earnings growth expectations for 2011. We believe that the firm should accumulate significant excess capital by 2012, and note that management is committed to paying out 30-50 per cent of earnings in dividends – something that does not appear to be reflected in current consensus estimates. Our fair value estimate for the stock is €105.