Why I'm Bargain Hunting in the Eurozone

LONDON -- If you're looking for a stock market bargain, you might take a peek at those sectors or countries that have been hitting the headlines for the wrong reasons, as there's a fair chance you might come across a company that has been unfairly marked down.

Currently, most of the bad financial news is coming out of the eurozone: those European Union member states who have adopted the euro as their common currency. It's quite possible, though, that the fallout has disproportionately depressed shares in some eurozone-based companies that are relatively insulated from its troubles because they make most of their sales outside the eurozone and/or operate in defensive sectors like health care.

Europe-based, yet worldwide businesses
I'm generally unwilling to invest in the typical eurozone country. Most of them have poor demographics, so over time their increasingly elderly populations will end up being supported by fewer taxpayers. Given that many eurozone citizens nowadays vote as if the world owes them a living, this does not bode well for their future.

Another deterrent is the tendency of eurozone politicians to spend borrowed money in order to buy votes, with Greece being the poster boy for this behaviour. Then there's the problem that their economies -- with the major exception of Germany -- are becoming less competitive in the modern globalized world, yet they generally refuse to make the necessary economic reforms because this upsets special interest groups at home.

However, I'm currently looking at several eurozone-based multinationals with strong global brands which operate in sectors that generally do well in an economic downturn, and where much of their business comes from outside the eurozone.

Britain's eurozone companies
Many British investors already own shares in companies like this, the best examples of which are the three dual-listed Anglo-Dutch members of the FTSE 100 index: the publisher Reed Elsevier, the oil super-major Royal Dutch Shell, and the consumer goods giant Unilever.

Another such company with strong European roots is Reckitt Benckiser, which was formed in 1999 when Britain's Reckitt & Coleman merged with Holland's Benckiser, although, unlike those companies mentioned above, it is not separately listed in Amsterdam.

Consumer goods and booze
Two of my favorite stock market sectors are alcohol and consumer goods. That's because these companies make the sort of products that people tend to keep on buying even when times are tough. A major point in their favor is that many of these companies are expanding into the emerging-market nations, which is where most of the world's economic growth in the next couple of decades is likely to come from.

Henkel, the maker of Persil, is a good example of this. It is Germany's main competitor for Reckitt Benckiser and Unilever in many of their markets; it already does business in some 125 countries, and almost two-thirds of its sales now come from outside Western Europe. But Henkel's shares currently trade at a price-to-earnings ratio of 18.2, which is a couple of points higher than Unilever, so they're not what you'd call cheap.

I'm more interested in the European multinational brewers such as Holland's Heineken International (OTC: HINKY) and Denmark's Carlsberg Group (OTC: CABGY). These companies are respectively the third- and fifth-largest brewers in the world, but they are on much lower historic P/E ratios than SABMiller (LSE: SAB.L  ) , which is second only to Anheuser Busch InBev.

Some numbers
Below is a table that compares Carlsberg's and Heineken's P/E ratios and the proportion of their sales that come from outside Western Europe with SABMiller.

Company

Historic P/E Ratio

% Sales Outside Western Europe

Carlsberg

12.8

42%*

Heineken

15.3

57%

SABMiller

18.8

85%*

*SAB's figure is for Europe as a whole, while Carlsberg gives a combined figure for Scandinavia and Western Europe. Only Heineken gives a separate figure for Western Europe.

SABMiller is deservedly on a higher P/E ratio than both Carlsberg and Heineken because of its lower dependence upon Western Europe, where growth should be quite poor for several years thanks to the eurozone's problems, and also because it derives about 70% of its profits from the faster-growing emerging markets.

SABMiller's high proportion of sales in Africa (36%) reflects its South African roots, though Carlsberg and Heineken are expanding into Africa and the other emerging-market nations both organically and through acquisitions.

So while Carlsberg and Heineken trade at a discount to SABMiller, I think both companies are worth a second look. Interestingly, there is another way to get into Heineken through the shares of its 50.005% majority owner, the separately quoted, family-controlled Heineken Holding, which trades at a much lower P/E ratio of 13.

Easy to deal and follow
Nowadays it is almost as easy to buy shares in a continental European company as it is in a British company, because most online brokers make it easy to trade foreign shares. The language barrier shouldn't be a problem, as most major European companies also publish their reports and accounts in English.

If you prefer to invest in funds, rather than individual companies, you might consider European investment trusts that have big holdings in the major European and Swiss multinationals, such as JPMorgan European Investment Trust and Henderson Eurotrust.

Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors for 2012" -- our guide to three favorable industries. This free report will be dispatched immediately to your inbox.

Further investment opportunities:

Tony owns shares in Reckitt Benckiser and Unilever. He holds no other shares mentioned in this article. Motley Fool newsletter services have recommended buying shares of Unilever. The Motley Fool has a disclosure policy. 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.


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