French Institutions at Discount on Euronext Paris

Paris' NYSE Euronext Exchange

The view that the European stock market is cheap has been propagated for several months now. When scrutinized, the European debt crisis really has reduced the value of some stocks for the sole reason that they are headquartered and listed in Europe. On Euronext Paris - Total, Sanofi, Louis Vuitton Moet Hennessy (LVMH) and Danone – four French institutions accounting for roughly 31% of the CAC-40 index’s market capitalization and doing most of their business abroad have been affected by the European debt crisis merely by being listed in Europe. This is apparent particularly when comparing them to similar US companies.

Total is a French multinational oil and gas company with a market capitalization of close to EUR 87 billion. Total counts as one of the 6 “Supermajor” oil conglomerates globally and obtains 3% of its profits from France. Its price to earnings ratio (P/E) is around 8.5 currently, compared to the USA’s ExxonMobil trading at 11.5 times. Moreover if we employ another comparison statistic - the prices per barrel of oil held in reserves, Total’s enterprise value is around 11 times total reserves compared to Chevron with 21 times. A simple analysis of this comparison would be that the markets judge each barrel of oil Chevron extracts to be worth roughly twice as much as each barrel for Total. This seems erroneous based on the fact that before the global financial crisis and the eurozone’s own crisis, the two companies traded on an almost identical multiple.

Sanofi Lab

Secondly, Sanofi is the world’s fourth largest pharmaceuticals company by prescription sales and has a current market capitalization of EUR 102.88 billion. Despite only deriving 5% of its profits from France, they trade on a multiple of 14 times earnings compared to 16 times for their competitor Johnson & Johnson.

Meanwhile, LVMH is heavily dependent on Asia rather than Europe for its growth. This is a continuing trend as the Asian middle-class swells. It has a market capitalization of around EUR 66 billion, with its most well-known brands including Dior, Celine, DKNY, Fendi, Givenchy, Kenzo, Marc Jacobs, Loewe, Guerlain, Bulgari, De Beers Diamond Jewellers, Tag Heuer, Sephora, Belvedere, Dom Perignon, Hennessy, Glenmorangie, Krug, Chateau d’Yguem, Moet & Chandon, and Veuve Clicquot. In line with most luxury companies that have high PE ratios relative to other industries, LVMH trades at 18 times earnings compared with 21.5 times for US’ Tiffany.

Lastly, Danone is a leading French food products manufacturer focused on fresh dairy products, bottled water, cereals, baby foods, and yogurts. Their current market capitalization is EUR 34.4 billion. 10% of its profits come from France and 50% of its profits from emerging markets. Danone trades at the same P/E ratio to Coca-Cola despite being much faster growing, which suggests that they are trading at a discount to Coca-Cola. This can be seen by juxtaposing its earnings per share growth since 2007 with Coca-Cola – 95% compared to 70%.

An active stockpicker's portfolio

Therefore, it may be good to take a look around Europe’s stocks and compare them to comparable companies across the Atlantic. These discrepancies are a result of a top-down model of investment run by most major asset managers and hedge funds whereby investment decisions are made based on geography of where they are headquartered and listed. This is why billions of dollars have left Europe since 2007, which may be justifiable from a risk management perspective but is also indiscriminate and has created anomalies. Hedge funds and quantitative trading housing supposedly exist to arbitrage away these anomalies, but having not done so, it is left to the active stock pickers and common individual investors to correct these discrepancies and profit.