The sentiment towards European equities is very poor at the moment. There are, however, some reasons to be positive, although any gains from here are likely to be led by a different type of company than those that have driven the market out of the nadir of March 2009. Companies certainly face challenges: demand is recovering slowly, costs are rising and liquidity is being withdrawn. But equities are good value, and while growth will not be easy to come by, we do not subscribe to the double-dip view and instead see the global economy continuing along its bumpy road to recovery. Small and mid-cap firms have the added potential of being possible takeover targets. Corporate balance sheets are strong and companies will be looking to use this capital to build scale and efficiency in an uncertain economic environment. This should help put a floor under valuations.
The companies that will prosper in this new environment will be those that can demonstrate market leadership, have high returns on capital and strong balance sheets. The differences between these strong businesses and the weaker, marginal players will become more apparent. This has not been the case over the last two years as liquidity flooded the system and markets recovered. So these quality businesses have not necessarily been priced at a premium. Here I have chosen three quality businesses with non-cyclical growth characteristics that are offering good value.
One of our long-term favourites is C&C (LSE: CCR), the premium cider producer. This former stockmarket darling was caught out in 2007 by aggressive competition, poor weather and deteriorating economic conditions. The business has since been restructured by new management, which has made some excellent spending decisions and repaired the profitability.
They bought Tennent’s, the dominant beer in the Scottish market, and Gaymers, a portfolio of cider brands, both underperforming businesses. These acquisitions gave C&C more pricing power, and some earnings growth from restructuring. The main brand, Magners, continues to grow as premium cider takes its share of the long alcoholic drinks market. The longer-term opportunity lies in the international market, where penetration is far lower than in Britain, which accounts for 50% of global sales. Investors still have a negative view of the company due to its past performance, so we can access this growth at a good price.
We also like Irish dairy and nutritionals business Glanbia (LSE: GLB). Management has moved the business into areas with more attractive growth prospects and higher profitability: 50% of profits now come from infant formula, sports and personal nutrition. Yet Glanbia is still valued as a domestically focused Irish dairy business when the reality is very different.
Amer Sports ( Helsinki: AMEAS
) has historically been rather less than the sum of its parts, which include top sports brands such as Salomon and Atomic (ski equipment) and Wilson (tennis and US team sports). But with a new chief executive joining from Procter & Gamble, the brands are now being more commercially managed, while the business is shifting towards apparel and footwear. This will have the effect of structurally increasing sales, profits and returns on capital. We should also expect some sort of corporate activity with some more capital-intensive brands being sold off. We are at the start of this journey.