After eight quarters of contraction, Spain's gross domestic product, or GDP, experienced 0.1% growth which marked a turning point for the fourth-largest economy in the euro zone. According to the Spanish statistics agency, the country's economy emerged from a two-year recession in the third quarter thanks to export growth, which is up 21% since 2008.
As usual, investors were ahead. The Madrid stock market grew 30% since June, showing that investors are looking at Spain with a lot more interest than before. In fact, Bill Gates, Warren Buffett, and Carlos Slim are increasing their positions in Spanish ventures.
That means it might be time for you to get some Spanish assets as well. Here are three Spanish ADRs to consider.
Telefonica: expanding in Latin America
The first company to pay attention to is Telefonica (TEF 1.81%), a leading telecom service provider with operations in Argentina, Brazil, Chile, Mexico, Peru, and other Latin American countries.
As you can see, this company is highly diversified geographically. However, its European division still accounts for 49% of revenue. Latin American, which accounts for 48% of revenue, remains one of the best performing regions for the company with Brazil as the star. Telefonica expects to become the leader in the Brazilian market by expanding its LTE network and fixed broadband services. Market share in the country has been enhanced, reaching 28.69% was driven by service quality improvements. In addition, the company is expanding in other regions such as Argentina, Chile, Colombia, and Peru by introducing cheaper devices, tiered pricing, and enhanced network capacities.
Grifols: record sales
The second company to look at is Grifols (GRFS 1.75%), which after its $3.7 billion acquisition of Talecris in 2011 made a big step into the global plasma-derived protein business.
This company in particular enjoys the benefits of being part of a market with high barriers to entry. Plasma fractionation is no joke; it requires immense amounts of capital, five to seven years of lead time for new capacity to be approved, and vast know-how. So, Grifols has quite the moat. Moreover, providing that global plasma supply and fractionation capacity are limited, the company's full vertical integration guarantees it enough plasma and the infrastructure to fully process it.
Grifols performed quite well in the second quarter, announcing record quarterly sales. Plus, net profit increased 36.9% to 183 million euros in the first half of this year. Sales in the United States had a good performance as well, with a 10.6% increase.
However, since Spain only represents 7.9% of total turnover for Grifols, an improvement in the country's GDP would not make a big impact for the company.
Banco Santander: high diversification, low exposure
The third company to investigate is one of the world's largest financial institutions, Banco Santander (SAN 0.99%).
The third quarter for the bank was not very impressive. Net income was €1.05 billion, or $1.42 billion, showing an 8% increase quarter over quarter if we exclude the effect of currency headwinds. All major indicators for Banco Santander were in line with expectations.
Thanks to the company's geographic diversification, Banco Santander's exposure to Spain is moderate. The country accounts for less than one fourth of the bank's operations. If we consider attributable profit, only 7% originates in the country. Latin America, however, represents roughly half of earnings. Hence, an improvement in the Spanish economy would definitely have some impact on the bank, but a very moderate one.
Bottom line
Overall, Spain has become a bit more competitive, which is reflected in its higher exports. However, domestic demand and job creation are still depressed, and these should be factors of concern. The three companies mentioned are contributors to Spanish exports and clearly focused on their foreign markets.
As mentioned before, Telefonica's interests are more into fast-growing emerging markets, which is a good sign. However, since telecommunications expenses are related to disposable income, better domestic demand should boost the company's sales in its home country. So, keep an eye on Spain's labor market and sales indicators.
Grifols will remain a low-cost provider of plasma-derived therapies. The evolution of the Spanish economy should not make a significant difference for the company, which will preserve its high manufacturing yields and continue strengthening its brands.
Banco Santander navigated the Spanish downturn better than the country's regional banks and is in perfect condition to profit from more business in its native country. However, the impact on its overall profitability is limited.
