1 European Stock I'm Ready to Buy

Despite the turmoil in Europe, there are Europe-based companies that could be good bets right now. There is one in particular that occupies the top spot of my "buy next" list.

Strangely enough, I happened on this overseas stock while shopping right here in the good ol' U.S. of A.

A couple of years ago my wife and I started noticing these funny stores cropping up around us in Las Vegas. As far as we could tell, they were grocery stores, but by size they looked more like glorified gas station convenience stores. After hearing good reviews from a few friends, we decided to wander into one.

For a guy like me, the experience is bliss. The stores are small enough that I can buzz through a shopping trip in record time and still find everything I need. Much appreciated was the fact that this guerrilla grocer cut down on the overabundance present in most stores -- rather than stock 47 different toothpastes, they have maybe four or five solid selections.

But it wasn't just me; my wife was hooked as well. Soon we were driving out of our way, past the nearby Smith's -- a "standard" grocer in the Kroger family -- and Von's -- ditto, but part of the Safeway group -- to do all of our shopping at Fresh and Easy.

From a shopper's perspective, I appreciate that Fresh and Easy is exactly what it says it is -- an easy place to shop with a focus on fresh and organic foods (without the pomp and prices of Whole Foods (Nasdaq: WFM  ) ). From a business perspective, I really dug the efficiency of the stores and the fact that much of what I found in my cart was high-quality Fresh and Easy brand items (which are higher-margin sales for a grocer).

But the question was: Is there an investment opportunity here?

Yes... but no
Figuring that Fresh and Easy was some small, privately owned start-up (a la Trader Joe's early days) I was surprised to find out that it's owned by the massive U.K. grocer Tesco (OTC: TSCDY.PK). So... invest in Tesco? It wasn't quite that simple.

While the now-cliche Peter Lynch line "buy what you know" can lead investors toward good opportunities, not everything that "you know" will turn out to be a good investment opportunity. In this case, I quickly learned that Fresh and Easy is a very small slice of Tesco's business and, furthermore, it's an unprofitable slice.

I may love Fresh and Easy, but that wasn't enough to invest in the giant Tesco. I tabled the idea.

Along came Buffett... and friends
Tesco was simmering on my investing back burner when I noticed that it had a very notable backer in investing great Warren Buffett. According to the most recent filings, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) has amassed a near-$2 billion stake, making it Tesco's largest shareholder.

While Buffett has been building that stake for years, he gave the position a big boost earlier this year, jacking up Berkshire's stake from 3.2% of Tesco's outstanding shares to just over 5%. Interestingly, it was right around the same time that I noticed another of my favorite value investors, Tweedy, Browne, start its own position in Tesco.

Tweedy may not have the brand recognition that Buffett does, but the group has a stellar track record as a value investor and was one of the investors that Buffett profiled in his classic "The Superinvestors of Graham-and-Doddsville." In Tweedy's most recent investor update, Tesco was included as one of its three "material new purchases." Of Tesco and the other two (Hays PLC and HSBC) Tweedy noted: "All three of these companies trade at significant discounts from our conservative estimates of intrinsic value and pay an attractive dividend while we wait for value recognition in the market."

Tesco's back on the front burner
I like to keep track of what top investors are buying, but I make it a practice to avoid investing simply because a Buffett or Tweedy is jumping in.

A closer look at Tesco revealed the following:

  • The company has delivered a very solid average return on equity of 17.5% over the past five fiscal years (for comparison, Whole Foods' is closer to 11% and Kroger typically delivers over 20%).
  • It gets the bulk of its business from the U.K., but has solid and growing exposure to Asia, the rest of Europe, and the U.S.
  • The company's balance sheet is reasonably capitalized with debt-to-equity of 66% and EBTIDA debt coverage of more than 12 times.
  • Tesco has been steadily growing its dividend. In the most recent 12-month period, the payout has more than doubled from the same period in 2003 and has an average annual growth rate of 10%.
  • The grocer's huge U.K. business is stalling.

The final point is obviously a big bummer. My U.K. colleague G.A. Chester did a great job laying out why Tesco's problems are good reason to take a pass on the company's shares. A big part of the analysis is that -- not unlike U.S. retail hulk Wal-Mart (NYSE: WMT  ) -- Tesco took its eye off the ball at home while it busied itself growing elsewhere. Now it will have to retrench and spend a significant amount of money to win back customers that have been wooed by competitors.

The flip side is that concern over what's ahead in the near term for Tesco has pushed the valuation down. Tesco's current EBITDA multiple -- the valuation measure we should be using -- is 6.3, which compares favorably to French competitor Carrefour at 10 times and U.S. comparables Wal-Mart, Costco, and Target at 8, 9.9, and 7.4, respectively.

I'm in
Thanks to The Motley Fool's disclosure and trading policy, I'll have to wait before starting my position in Tesco. But between the company's scale and international presence, its attractive shareholder returns, its low-priced stock, and its dividend approaching 5%, I'm adding it to my Motley Fool CAPS portfolio and am ready to pick up shares for my personal portfolio. It also doesn't hurt that I have the opportunity to buy at better prices than both Buffett and Tweedy, Browne.

And what of my beloved Fresh and Easy? That could be frosting on the cake. The subsidiary needs to show that it can scale to profitability -- Tesco recently pulled out of Japan because it couldn't find footing there -- but it's been growing like gangbusters. I don't want to get ahead of myself here, but it's worth pointing out that this "growth market" for Tesco also happens to be the world's largest economy.

More Buffett buys
Maybe you're a fan of Buffett but are not quite taken with Tesco. My fellow Fools have outlined another segment of the market where Buffett has shown significant interest. To dig in, download a free copy of "The Stocks Only the Smartest Investors Are Buying."

The Motley Fool owns shares of Tesco, Berkshire Hathaway, and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Costco Wholesale, Berkshire Hathaway, Tesco, and Whole Foods Market. Motley Fool newsletter services have recommended creating a diagonal call position in Wal-Mart Stores. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Target, Wal-Mart, and Berkshire Hathaway, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (10) | Recommend This Article (43)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 13, 2012, at 6:11 PM, 102971 wrote:

    Just as a matter of interest, the UK shareholders of Tesco are pushing the company to dispose of

    Fresh and Easy since it has lost money every year since they opened it.

    Personally, I like the store and their special "take home" dinners but Tesco is certainly not on my "buy" list" as an investment. They are also having a tough time of it in the UK. CHECK YOUR FACTS!!!!!!!!

  • Report this Comment On June 13, 2012, at 6:22 PM, MasterOTUniverse wrote:

    He did check his facts: "The grocer's huge U.K. business is stalling."..

    Tescos is losing out to UK competitors like Asda (owned by Wal-Mart) who offer better prices..

  • Report this Comment On June 13, 2012, at 6:28 PM, portefeuille wrote:
  • Report this Comment On June 13, 2012, at 6:45 PM, TMFKopp wrote:

    @portefeuille

    This is the ticker I rated - http://caps.fool.com/Ticker/TSCDY.PK.aspx

    @102971

    I'm assuming, as MasterOTUniverse pointed out that you just misread -- poor performance in the U.K. is a primary risk facing Tesco right now.

    As for F&E, I could understand why U.K. shareholders would be upset with performance, but I'm willing to give it time -- grocery is typically a low margin business that will do best with scale.

    To be fair, Tesco does get dinged for deciding to start its F&E foray in Nevada and Arizona. Yikes. Though I'm personally glad b/c I enjoy the stores so much.

    Matt

  • Report this Comment On June 13, 2012, at 7:20 PM, midnightmoney wrote:

    Tesco is front and center here in Krakow, and everybody shops there cause they're cheaper, though they forgo quality to be so. Over at the university my editor's favorite phrase to let us know that a given translation's quality is not a priority is "just make it tesco quality". So probably an excellent investment at the end of the day:)

  • Report this Comment On June 13, 2012, at 7:59 PM, TMFKopp wrote:

    @midnightmoney

    Hahaha. Love that. Thanks!

    Matt

  • Report this Comment On June 13, 2012, at 8:18 PM, rpgarvin wrote:

    I believe Fresh and Easy has been a substantial drag on Tesco and our favorite investor Mr WB has challenged Tesco management to rid itself of this albatross

  • Report this Comment On June 14, 2012, at 2:21 AM, TMFMayn wrote:

    Jury remains out on Buffett's insight with Tesco.

    He bought initially at c333p six years ago and, while there have been a few dividends on the way of course, a 304p price yesterday does not indicate this is one of his better investments.

    US Fools should note that Britain's 'super investor', Neil Woodford, effectively sold his Tesco shares to Buffett after January's profit warning. Woodford runs a £20 billion portfolio and has a superb record of thrashing the FTSE 100 index through buying large-cap, reliable and dividend-paying shares, so his actions are important to guru-watchers as well.

    More on the Buffett-Woodford battle here:

    http://www.fool.co.uk/news/investing/2012/02/17/tesco-woodfo...

    Should you wish to read more about Buffett's Tesco purchase, or more about how Neil Woodford has beaten the UK market (and which shares he favours now), then I would urge you to click the link below and read the first two *free* Fool reports:

    http://www.fool.co.uk/news/investing/2012/05/24/the-motley-f...

    Happy investing

    Mayn

  • Report this Comment On June 14, 2012, at 6:23 PM, Sotograndeman wrote:

    Mayn,

    I'd take the opposite side of your argument and suggest that Buffett's recent sizable addition to his long-standing TSCO holding REINFORCES his confidence in the company. That gets my attention.

    Who can argue with the guy? Woodford is simply not in the same league. But having Tweedy Browne in there too is icing on the cake.

    Buffett likes to say he only buys when he can see where a company will be in 10 years. We should all be trying to figure out what the Oracle sees that us mere mortals cannot.

    Disclosure: long TSCO

  • Report this Comment On June 15, 2012, at 12:01 PM, kvet wrote:

    As a Brit in Bristol living within shopping distance of all the big Brit supermarkets, here's my take on Tesco.

    Many would regard it as the most "downmarket " of the majors, together with Asda (sorry guys!). It came a cropper last year over its price-cutting policy at Xmas. It was also perceived as having cut its shop staffing levels too low, and its stores were starting to look outdated. Its shock-horror market share drop announced in February sent the shares down from 400p to about 300p now.

    The local analysts' take is that it will bounce back. Its cash flow is colossal, and revamping its stores will hardly make a dent in that.

    Overseas business is maybe better than this article suggests. Fresh 'n' Easy is something they will not let go easily-they don't want to seen as yet another Britco in the graveyard of U.S. retailing- and its results are improving . No doubt it will make a profit-someday!.

    It was too expensive at 400p, but is quite a catch at 300p- I bought last week.

    Warren is right- I doubt if he'll be selling soon.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1911758, ~/Articles/ArticleHandler.aspx, 11/22/2014 4:47:18 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement