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Analyzing financial statements is important, but sometimes it’s worthwhile to get out and kick the dirt a bit. That I recently did.
This past Saturday I returned from a two-week sojourn through Italy and Germany. I went there to accomplish two goals: 1) to get a sense of what I read about Europe’s economy is accurate, and 2) to see if either Germany or Italy offer investment opportunities. That I was able to enjoy a little sun on the Italian Riviera and catch the end of the German spargel season was a bonus.
First, Italy.
The U.S. press portrays Italy as debt-addled basket-case that’s hopeless at generating economic growth. To be sure, Italy’s economy has struggled since the 2009 recession, and the struggles continue to this day: GDP has contracted every quarter since the fourth quarter of 2011. But keep in mind, any individual or any one company does not necessarily reflect GDP.
The business people I spoke with (and this was principally in Florence and Marina di Massa) were cautiously upbeat. They see pockets of value, and they see opportunity for political reform. Italy, quite frankly, has too many regulations; too much bureaucratic overlording. Government, as is so often the case, is a primary impediment.
From a U.S.-investor perspective, I see value in multinational Italian stocks. These companies can create growth through their foreign operations, which offsets problems they might face in the domestic market.
Italian Stock #1: Eni SpA
Italy’s oil giant Eni SpA (NYSE: E) is especially appealing to U.S. income investors. Eni shares yield 5.8%, double the 2.7% yield provided by ExxonMobil (NYSE: XOM). Like ExxonMobil, Eni has a global presence, with energy assets in 82 countries. These assets generate $155 billion in annual revenue.
Between 2008 and 2013, Eni has discovered over 9.5-billion barrels of oil equivalents (BOE), which is 2.5 times its production in the previous five-year period. Over the past 12 months, Eni has brought online new wells in Mozambique, Angola, Norway, Ghana, and Congo.
The Mozambique wells are of particular interest. Here, Eni owns a substantial stake in a huge natural-gas field located off the coast. The field has the potential to produce an astonishing 85-trillion cubic feet of natural gas. Mozambique’s proximity to India, China, and other emerging Asian countries gives Eni a leg up on U.S. natural gas producers in the liquified natural gas market.
Italian Stock #2: Luxottica Group
We frequently read alarmist stories of how the rich are growing richer compared to the rest of the population. I don’t get terribly alarmed by such accounts for the simple fact wealth is earned not distributed. But if this is the case, and if the trend continues, then Milan-based Luxottica Group (NYSE: LUX) is sitting in high cotton.
Luxottica owns and licenses an array of brands that appeal to the rich, and even the not so rich. They include Ray-Ban, Polo, Chanel, Coach, Dolce & Gabbana, Tiffany, Versace, and many more. Demand appears insatiable. Over the past 10 years, Luxottica has seen its revenue more than double to $9.9 billion from $4.3 billion. Asia and Eastern European countries continue to emerge and create more wealth. This trend should keep Luxottica’s revenue growing at a 10% average annual rate into the early 2020s.
Luxottica yields around 2.9%, but the dividend has been steadily ratcheted up year after year for the past 14 years. As it is, Luxottica’s dividend is among the highest among luxury-goods producers. I don’t expect that to change, given the annual increases in the dividend payout.
Italian Stock #3: Fiat SpA
As for my third pick, it isn’t a dividend payer, but I like the company anyway for its growth potential. I refer to the large car manufacturer Fiat SpA (OTC: FIATY).
With Fiat, I speak from experience. When I was teenager, I owned a Fiat Spyder, a two-seat convertible. The car was a blast to drive; that is, when it ran. (Back then Fiat was also an acronym for “fix it again, Tony.”) I eventually had to sell my Fiat because I couldn’t take the stress of rolling the dice each morning on whether it would start.
Times have certainly changed. While in Italy, I had the opportunity to drive a number of Fiat products: a 500L, a Lancia Ypsilon, and an Alfa Romeo Giulietta. They were all finely crafted vehicles that drove superbly. (My only quibble was the lack of armrests in the 500L.)
In addition to owning Lancia and Alfa Romeo , Fiat owns Ferrari and Chrysler. I was surprised at the number of Jeeps that populate Italy’s Autostrada. I see transatlantic opportunities: Fiat moving more of its Italian brands into the United States and Chrysler moving more of its brands (Jeep in particular) throughout Europe.
Fiat is already a terrific growth story within the auto industry. Annual revenue has nearly doubled over the past 10 years to $118.3 billion. Over the trailing 12 months, revenue is up to $146.6 billion. I view Fiat as a solid value when you consider its shares trade around $11. The same price they traded five years ago.
Perception frequently differs from reality. This is the case with Italian stocks, which is why I see opportunity for American investors.
Tune in this Friday, and I’ll give you the perception and reality on Germany.
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