Greece is moving towards a probable default on its debt somewhere down the line and a possible exit from the eurozone. Talk of “contagion” seems over-done to me — not just because I’m an optimist by nature — but because the European powers-that-be are confident the Greek turmoil can be contained.
The financial levers are there to prevent a Greek drama turning into a European tragedy, and Central Bank president Mario Draghi has pledged to do “whatever it takes”.
Of course, markets are wobbling, as they always do, when uncertainty is in the air. Are Grexit fears providing a good opportunity to buy depressed shares of UK-listed companies with a high exposure to Europe? In particular, are Vodafone (LSE: VOD) (NASDAQ: VOD.US), Banco Santander (LSE: BNC) (NYSE: SAN.US) and Northgate (LSE: NTG) attractive buys?
Northgate
FTSE 250 firm Northgate is the UK and Spain’s leading specialist in light commercial vehicle hire. The Spanish business contributes 30% to the group’s revenue. As it happens, Northgate released its annual results today for its financial year ended 30 April.
The company reported a 45% increase in underlying earnings, and hiked its dividend by the same amount. Management said the weakening euro adversely impacted pre-tax profit by £2.6m, but provided a favourable £28.8m impact on net debt.
Northgate is a well-run business with decent margins, and the price-to-earnings (P/E) ratio of 11.4 looks attractive compared with 18.5 for the FTSE 250 index. Similarly, a dividend covered 3.5 times by earnings and a yield of 2.5%, compares favourably with the mid-cap market’s 2.4% yield and 2.25 times cover.
Banco Santander
In 2014, Banco Santander reported an increase in profits in all 10 of the group’s key markets for the first time since the financial crisis. Europe contributed 52% to profits (UK 19% and Spain 14%), Latin America 38% and the US 10%.
Earnings were up 24% on the previous year, and analysts are forecasting 12% annual growth for the next two years. In addition to its solid earnings prospects, Santander is financially strong, having added €7.5bn to its capital from an equity fundraising in January and rebased this year’s dividend to one third of the 2014 payout.
On a current-year forecast P/E of 11.2, with a still-decent 3.2% dividend yield, Santander looks an attractive proposition.
Vodafone
Vodafone has always had significant exposure to Europe, and the FTSE 100 telecoms giant has been intent on increasing it, following the sale of its stake in US phones firm Verizon Wireless last year.
Vodafone’s most recent results show that just over half of the group’s revenue was generated in Europe (excluding the UK). Acquisitions in Germany and Spain, substantial organic investment in Europe, and early-stage discussions with TV and telecoms group Liberty Global about asset swaps on the continent all highlight the importance of Europe to Vodafone.
The trouble I have with the company is it’s current valuation; namely, a P/E of 41.5 based on forecast earnings for the year to March 2016. A prospective 5% dividend yield has more appeal, but the payout is uncovered by earnings, and I’m not convinced the dividend is sufficient compensation for the nosebleed P/E.