Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Christian Blaabjerg, equity market strategist at Saxo Bank.
Contrary to most investors, we at Saxo Bank think it’s too soon to buy early cyclical stocks in hope of a short-term market turnaround. Instead, we look for stocks backed by strong balance sheets and with low debt-to-equity ratios. A stock should also be able to attract international investment, generate earnings growth and offer a decent dividend yield. Here are three that fit the bill.
Novozymes (Copenhagen:NZYMB) is the top global producer of industrial enzymes, with a market share of around 40%. Its second-generation enzyme for producing fuel ethanol will boost earnings over the next few years. Management expects sales growth of 8%-13% versus a market consensus of 11% for 2009, and a long-term growth rate above 10% a year (against the market consensus of 9%) to be reached within the next three to five years. The group expects to spend DKK2.5bn-2.8bn in capital expenditure (capex) in 2009-2010. That’s 13%-15% of sales, but the capex-to-sales ratio is then expected to fall to 8% a year. Novozymes aims to fund this spending mainly from internal funds and expects a free cash flow of DKK100m-300m in 2009, even after this huge rise in capex. Net debt came in at DKK1.38bn (30.8% of equity) at the end of 2008. While we expect net debt to jump to DKK1.54bn by the end of 2009, it will actually fall below 30% of equity. The stock yields 1.35% (the Danish index average is 2.34%), but we recommend Novozyme for its very promising growth prospects.
We believe Vivendi (Paris:VIV) is one of the best-placed media stocks due to its subscription revenue base, limited advertising exposure, geographical spread and its involvement in several uncorrelated businesses. The group has exposure to emerging markets and to the fast-growing gaming industry. It yields 7.0%, compared to the 6.24% yield offered by the French CAC 40 index. Vivendi had €8.3bn net debt at 31 December 2008. It also has €5.2bn of undrawn facilities, no significant repayment due before 2012, and enjoys a BBB-stable credit rating. While guidance for 2009 is vague, it hasn’t issued a profit warning, and in the context of the media sector the statement was robust. We think Vivendi is inexpensive. It trades on a headline 2009 estimated earnings per share (EPS) multiple of 8.5 times, a 5%-10% discount to a blend of the European media and telecoms sectors, suggesting considerable upside.
Vodafone (LSE:VOD) shares have suffered due to concerns about the economy. But at eight times headline and seven times underlying earnings, plus a dividend yield of 6.7%, the stock is priced for a very steep fall. This is overdone. Vodafone may keep underperforming in individual markets, but the overall cyclical resilience of the industry is more important. The European unit’s recent performance has been unsatisfying, but our sense is that new management is more focused on these businesses and prepared to identify and tackle areas where there are issues. We’re concerned about possible margin dilution in India and the weakness of the Turkish business, but this doesn’t represent a recent change in the businesses’ fundamentals. At the current price and on our forecasts, Vodafone offers an almost 7% yield next year, which looks attractive against the FTSE 100, which offers 5.3%.
The stocks Christian Baalbjerg likes
| 12-month high | 12-month low | Now | |
|---|---|---|---|
| Novozymes | DKK535.00 | DKK326.00 | DKK384.50 |
| Vivendi | €27.44 | €16.32 | €20.04 |
| Vodafone | 170p | 96p | 124p |