EuroStoxx 50 Outperformers
25th June 2020
The stocks in the EuroStoxx 50 index that are currently signalling the most bullish outlook using technical analysis are; Deutsche Borse, Schneider Electric, ASML Holdings and L’Oreal.
Let’s have a look at the fundamentals and see what is going on with these companies.
Deutsche Borse
Share price: €158.85
Deutsche Borse owns the Xetra electronic trading system, which is the main hub of the German stockmarket, and a derivatives exchange together with other exchange and clearing systems. At first glance, one would expect the shares to trade in line with the overall market, rather than outperform. Also the stock looks expensive on a historic trailing twelve months (TTM) P/E of 26.6 and a dividend yield of 1.86%.
So what is going on? The answer may be that another round of takeovers and mergers are about to take place in the sector. That is usually a powerful stimulant for share prices, as any bidder will have to pay a premium to the existing share price in order for a bid to be successful.
The London Stock Exchange (LSE) is currently awaiting approval from the European Commission (EC) for the takeover of Refinitiv, a financial data provider. The EC are due to rule on this by October 27. The LSE owns the Italian stock exchange (Borsa Italiana), and many commentators expect that it will be forced to sell this business as a condition of getting approval from the EC for the Refinitiv deal. Refinitiv is 45% owned by Thomson Reuters, and is similar in many ways to the old Reuters business which supplied news and information on shares and bonds. The combination of the LSE with
Refinitiv should provide more effective competition against Bloomberg which dominates that sector, in the opinion of many commentators.
​
The reason why the LSE could be forced to sell the Borsa Italiana, is because the latter is the majority owner of the fixed income platform MTS. However, Refinitiv owns Tradeweb Markets, another fixed income platform, and the ownership of both would make the LSE the dominant player in government bond trading, which would be detrimental to competition.
In 2017, the LSE was unwilling to sell MTS as a condition of merging with Deutsche Borse. The strength in the latter’s share price could be due to investors expecting that the outcome will be good for DB shareholders, whatever it is.
​
If the LSE is forced to sell the Borsa Italiana and the MTS, then Deutsche Borse is likely to be a buyer as it has a very strong balance sheet with excess cash of €2 billion. Competition could come from Euronext, but Deutsche Borse is the bigger player. Also, if the LSE is forced to sell the Borsa Italiana/MTS, and agrees to do so in order to complete the Refinitiv takeover, it might then bid for Deutsche Borse as the obstacle to a successful bid last time around is removed.
Finally, in the unlikely event that the LSE is not forced to sell the Borsa Italiana/MTS, then its next target is likely to be Deutsche Borse.
​
Why is there such a high level of takeover activity in this sector? Primarily for two reasons:-
Firstly, the large stock exchanges have good quality of earnings. Brokers are forced to go to the largest exchanges in executing most deals for clients as that is where they will get the best prices due to the higher level of liquidity. Also, while it is true to say that the volume of trading (which is the prime determinant of the income of the exchange) increases in a bull market, the volatility that arises during the first stage of a bear market also causes an increase in volume. Secondly, there are significant economies of scale in combining two large trading systems, whereby duplication of costs can be eliminated ad profitability thereby enhanced. Even before any such economies of scale arising on mergers or takeovers, Deutsche Borse’s net profit margin is already a whopping 28%. That puts it in the same league as ‘Big Tech’.
Schneider Electric
Share price: €96.74
Schneider Electric is headquartered in France and is in the Industrial Machinery sector. It has two main divisions, Energy Management and Industrial Automation. The latter includes the provision of IT centre software.
​
Industrial automation is another term for robotics, and this is a high growth area as there are many attractions of your manufacturing being done by a few robots instead of a group of humans! Japan is particularly strong in this new technology and robotic companies command high valuations in that market.
​
Schneider Electric shares currently trade on a P/E (TTM) of 22.3 times, which is not too demanding for a company that has experienced average earnings per share growth of 7.5% per annum for the past five years, per the website ‘Simply Wall Street’. The net profit margin is fairly good at 9% and the dividend yield is 2.66%. There is surplus cash of €3.6 billion on the balance sheet as at 31 December 2019. Surplus cash is not to be confused with net cash, as there is long term debt of €6.4 billion, nevertheless, this company, which currently has a market capitalisation of €51.7 billion, is in a position to make an earnings enhancing acquisition with this firepower.
ASML Holdings
Share price: €361.81
​
ASML is headquartered in the Netherlands and is a manufacturer of semi-conductor equipment and materials. It specialises in manufacturing ‘ultraviolet lithography systems’. At first glance the P/E looks high at 52 times (TTM) but the forward P/E is 32 indicating that very high earnings per share growth is expected. The average earnings per share forecasts by analysts per Yahoo Finance are €6.88 for 2020 and €8.13 for 2021. That represents an increase of over 20% if it materialises.
​
The balance sheet is very strong with €4.7 billion in cash and cash equivalents including short term investments, versus €3.1 billion of long term debt. The dividend yield is a low 0.81%, but that is a common feature of high growth companies. The net profit margin is a very impressive 22%, which is close to ‘Big Tech’ levels.
​
With a market capitalisation of €155 billion, ASML looks too big to be a takeover target, However, its highly rated shares puts it in a position to make earnings enhancing acquisitions.
L’Oreal
Share price: €281.00
​
L’Oreal manufactures cosmetics and is headquartered in France. Turnover was resilient during the Covid 19 lockdown with a reduction of only 5% for the first quarter of the current year.
​
At first glance, the P/E looks high at 42 (TTM) and the dividend yield is nothing special at 1.38%. The strong balance sheet is underpinned by net cash at €4.5 billion but the market capitalisation of €158 billion means the company is almost certainly too large to attract a takeover bid. The net profit margin is a healthy 18.5%, but L’Oreal has made no earnings forecast for 2020 due the uncertainty caused by Covid 19.
​
Why then the recent burst of strength in the share price and the high P/E rating of 42 times earnings? The answers lies in its recent success in selling its products on-line. These now represent 20% of total sales, which is a huge number for a company that had no significant on-line presence until relatively recently. The recent growth in on-line sales is particularly impressive as regards Chinese customers, whom many in the luxury sector believe are crucial to its future prospects.
​
The very bullish outlook per the technical analysis, together with an examination of the fundamentals, indicates that this stock is in the process of being re-rated from being a cyclical consumer stock to a high growth on-line retailer.