Three European shares popular with professional investors
Why these three companies have caught the eye of Europe’s most talented fund managers.
Over the years we’ve found some seriously good stock pickers investing in Europe.
The very best feature on our Wealth 150 list, which is currently home to seven European funds – including the FP CRUX European Special Situations Fund featured on these pages.
To get a feel for the characteristics these investors look for in a stock, we’ve crunched the numbers to discover the three most widely held companies among the seven funds. Below, I take a look at the stocks and explain why they have found favour among those who invest for a living. Like all stock market investments, their shares will fall as well as rise so investors could make a loss. Any yields quoted are variable and not a reliable indicator of future income.
Ryanair’s come a long way since it first took to the skies in 1985.
Back then, its 15-seater Bandeirante aircraft were so small it had to impose a 5’2” height limit on its cabin crew. Today, it’s Europe’s number one airline, carrying 130m customers to more than 200 destinations every year. 170 new routes are due to be added this winter too.
Airlines have a reputation among investors for underwhelming returns. So it’s somewhat surprising to see one proving so popular with fund managers - especially so given the intensifying competition in European airspace.
However, even long-time sceptic Warren Buffett has recently bought in to four American airlines, suggesting something fundamental could be changing in the industry.
So what’s attracting our favourite European fund managers to the shares?
A quick glance at some key metrics across the sector gives us a clue. Ryanair has the highest operating margins of its major peers, while its return on capital employed of 15.4% stacks up pretty well too.
With low-cost rivals like easyJet and Wizz also adding capacity, the group’s bread and butter short-haul flights are facing increased competition. But Ryanair has a clear advantage on costs, with industry-leading fleet costs and ticket prices. Ryanair has also locked in a significant portion of its fuel costs at under $50 per barrel for the next couple of years.
Perhaps because of boss Michael O’Leary’s notoriously outspoken nature, Ryanair has a habit of hitting the headlines for the wrong reasons. Recent news that a problem with planning its pilots’ annual leave means 40-50 flights a day will need to be cancelled is the latest example. While clearly disruptive for passengers, this represents less than 2% of Ryanair’s flights, and we don’t think the investment case is affected.
That said, investors should remember that air travel is a cyclical business, so a bumpy Brexit has the potential to generate some near-term turbulence.
At present, Ryanair doesn’t pay a dividend, but its €600m share buyback plan confirms that management have shareholder returns in mind.
View our Ryanair factsheet
German multinational Bayer’s €46.8bn of sales stretch from pharmaceuticals and consumer healthcare to crop science and animal health.
It also has a 64% stake in plastics manufacturer Covestro, with global sales of €11.8bn. It will be even bigger soon, as it looks to complete a $66bn deal for US agrichemicals group Monsanto.
It’s innovation and technology which link the company’s various operations. Bayer has spent €18.9bn on research and development in the last five years, and employs over 15,000 R&D staff worldwide. A combination of cutting-edge research and dominant market positions have helped maintain a healthy profit margin in excess of 20%.
Bayer is dominated by its pharmaceuticals business. Accounting for the bulk of sales and majority of profits, the drug portfolio is fairly concentrated, with the top four drugs accounting for almost half of revenues. Unfortunately, three of those four will have lost patent protection by the mid-2020s, when they will face competition from cheaper, generic versions.
Bayer - sales by division (€m)
Source: Bayer AG 2016 Annual Report
Bayer hasn’t stood still though, with 17 late-stage trials underway at the end of last year. Investors will be hoping for positive results but, as is always the case with pharmaceuticals, trials can fall at the final hurdle.
Uncertainty over the pharmaceutical business probably goes some way to explain the ambitious Monsanto bid. The deal would make Bayer the world’s largest supplier of seeds and crop chemicals. It’s a less volatile business and the steadier income stream should help underpin a dividend which has grown steadily since 2003. The shares currently offer a prospective yield of 2.7%
Mega-mergers are never straightforward though. The deal has yet to receive all the necessary regulatory approvals and even it does, integration on this scale brings risks.
View our Bayer factsheet
Novo Nordisk is the product of two Danish pharmaceuticals businesses set up to produce insulin shortly after its discovery in the 1920s. Almost a century later, insulin remains a central element of the business, with diabetes treatments accounting for 81% of sales in the first half of this year.
But competition has intensified, and 2016 was a tough year for the group as conditions in its important North American market worsened. Consolidation among Novo Nordisk’s US customers, has meant fewer, larger buyers who are better able to squeeze prices.
US sales have continued to grow, but growth expectations are now lower, and this has hit the share price.
Novo Nordisk - dividends per share (Danish krone)
Past performance is not a guide to future returns
Source: Bloomberg, 1995-2016
Yet Novo’s strong market position in diabetes is likely to prove a long-term positive. Diabetes is an increasingly common disease, with the number of sufferers rising from 108m in 1980 to 422m in 2014. Prevalence has increased from 4.7% of adults in 1980 to 8.5% today, boosted by rapidly rising rates in developing countries.
Steadily increasing demand has already yielded results for shareholders, with 20 years of successive dividend growth, although of course there’s no guarantee that will continue. The prospective yield is currently 2.8%.
View our Novo Nordisk factsheet
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
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