Since I began writing this five-part report on German ADRs, the country has leapt ahead in the medals race, and now leads the world in total medals won at the Torino Olympics. For the time being, congratulations to Germany. (Don't worry, we'll catch up.) With that sports news update out of the way, let's continue our examination of how Germany's companies are faring.
Yesterday, we looked at Germany's American Depositary Receipts (ADR) offerings in the fields of banking, utilities, and insurance. Today, we'll move on to review the country's chemicals and industrial machinery offerings (fascinating stuff, I know). As always, I'll preface each write-up with a synopsis of the "Level" of ADR on offer and the ratio of underlying shares to each ADR trading on the NYSE. To round out today's column, we'll then look at one company from another sector.
Without further ado, then, it's once again time to.
Get to know a country
(Level II ADR) 1 ADR = 1 Common Share
There's one thing you can't accuse BASF of: false modesty. In its latest ad campaign, the German maker of chemicals, plastics, and pigments bills itself as "The Chemical Company."
BASF is the world's leading chemical company on a sales basis, outstripping U.S. competitor DuPont
Even so, the company appears attractively priced -- at least in the short term. Although no U.S. analysts posit a long-term growth rate for BASF, they do expect the company to grow its profits by 14% next year. Trading at 12 times earnings and paying a 2.7% dividend, BASF looks intriguing.
(Level II ADR) 1 ADR = 1 Common Share
Next up, Bayer. And no, it doesn't just make aspirin.
What's more, considering that you don't even have to capitalize "aspirin" anymore, it's a good thing for Bayer shareholders that the company has other lines of business. Sure, Bayer still plays a role in Big Pharma, but it makes even more money from its chemicals businesses: fertilizing crops, killing off crop-eating critters, and whipping up all sorts of "poly" (-carbonate, -urethane, etc.) products for industrial consumption.
Lacking BASF's oil-products ace in the hole, Bayer is expected to follow the slow-growth route. Analysts expect a modest decline in profits next year, followed by 5% long-term growth for the company. Neither of those makes Bayer look particularly attractive at its current price of 16 times earnings.
Also, the company pays only a measly 1.6% dividend. Long story short, you need this stock like you need a headache.
(Level III ADR) 1 ADR = 0.333 Common Share
When Santa Claus visits bad German investors on Christmas Eve, he leaves certificates for SGL Carbon in their stockings. This little maker of industrial and aerospace carbon and graphite products trades for just $6 per ADR. Is that cheap?
Not when you notice that each ADR represents just a third of a German share of the company. Or that SGL has been profitless and free cash flow-negative all year long. Or when you tally up the losses and discover that from 2000 through 2005, the firm burned through a total of 1.3 million euros worth of operating free cash flow.
You better not pout. You better not cry. And even though analysts think SGL will boost its profits by 48% next year, you'd better not buy this stock.
(Level III ADR) 1 ADR = 1 Common Share
Don't be fooled by the name -- Pfeiffer Vacuum doesn't compete with either Hoover or Dirt Devil. Rather, the company specializes in equipment that creates real, honest-to-goodness vacuums (as in, "Space is a vacuum"). It also measures and analyzes vacuums (kind of like measuring the volume of one hand clapping, I imagine).
Unfortunately, potential U.S. investors in Pfeiffer are also operating in an information vacuum of their own. According to Yahoo! Finance, no U.S. analysts follow Pfeiffer, so Yahoo! gives no guidance on Pfeiffer's growth estimates. To get a read on growth, I therefore turned to Capital IQ, which shows that no less than a dozen foreign analysts do follow Pfeiffer. Overall, they expect the company to grow profits by about 9% next year.
With that number in mind, we have some context to apply to some of the company's valuation metrics: 33 times earnings and 20 times free cash flow. Enough context, in fact, to say that Pfeiffer might be priced too richly relative to its expected growth, at least in the short term.
That's all we have for today. Tune in again tomorrow, and we'll see if we can find some better investment candidates within Germany's semiconductors sector. In the meantime, feel free to dig into BASF. It seems to have the best chance of the lot to bring home some gold for your portfolio.