Many European stocks are trading at valuations that look tempting when compared to U.S. stocks, but there is good reason for that, and investors might be well rewarded by avoiding the temptation to buy. Falling stock prices are often like "catching a falling knife." While France and Germany both play a key role in the European Union, the two countries and many of the companies in them are worlds apart. Recent economic data indicates that even Germany is starting to see some impact from the eurozone crisis. When you see the effects of the crisis seeping into the strongest economy in Europe, it is a sign that all the countries are at risk of a further economic decline. France is in trouble and it appears to be getting worse as the crisis drags out. A recent CNBC article states:
"Given persistent downside risks to economic activity, we continue to forecast a mild GDP contraction of 0.2% in 2013. With the 3 percent of GDP budget deficit target likely to be missed," Guillaume Menuet of Citigroup wrote. The growing concerns about Europe's second-largest economy were heightened last week after The Economist called the country a ticking time bomb at the heart of the euro zone, drawing the ire of France's politicians."
The problem facing France now is that it is clearly in a downward spiral. As the economy contracts, tax revenues fall and the debt grows and all this looks increasingly ominous. The tough choice is to cut government spending, and that only creates more austerity and the negative loop continues, just as we have seen in Greece and Spain. It now looks like France is poised to enter this dangerous new phase as the economy drifts lower. That means that many French companies could be looking at lower earnings in the coming quarters, and that is likely to lead to lower share prices. With an unemployment rate of about 10.8% now and many companies looking to lay off additional workers, things are likely to get worse before they get better. An economic recession could further strain capital levels at many of France's largest banks and a recent downgrade of France's triple A credit rating is not good news either. For this reason, investors should consider avoiding French stocks for now and wait for the coming storm to pass. Here is a closer look at two French stocks that could be better buys at lower prices for investors who wait patiently:
France Telecom (FTE) shares were trading around $14 in September, but have dropped below $11. As a telecom company that provides Internet, mobile phones, and fixed-line communications, it offers a seemingly generous dividend, although it might not be able to sustain current expectations since it is seeing heavy competitive pressures and economic headwinds. The company has already announced it wants to reduce the dividend and that has put pressure on the stock and caused investors to wonder how many dividend cuts might be forthcoming. For now, France Telecom has said it plans to cut the dividend from about 1.40 euros per share to .80 euros annually.
In early 2012, a new mobile phone provider called Iliad launched services in France and it has already captured about 5% of the market. This is troublesome because it could continue to take market share over the next few years. Aside from competitive issues, the macro-headwinds in France appear to be getting worse. Moody's recently downgraded the credit rating for France and the country is facing an unemployment rate of over 10%. For these reasons, France Telecom shares could remain under pressure for quite awhile, although the stock is worth watching for signs of a bottom in the future.
Here are some key points for FTE:
Current share price: $10.70
The 52 week range is $10.20 to $17.28
Earnings estimates for 2012: $1.78 per share
Earnings estimates for 2013: $1.67 per share
Annual dividend: about $1 per share which yields around 10%
Total SA (NYSE:TOT) is one of the world's largest oil and gas companies and it is based in Paris, France. Since oil is a global commodity, many investors might assume that this company will be relatively insulated from macroeconomic issues in France or even Europe, and that could be true. However, the problem is that if France continues to drift lower, that probably means the European economy is worsening. If Europe remains weak or becomes a full-blown crisis, the entire global economy could be in jeopardy and that is likely to push oil prices lower. This is what could impact energy companies like Total because a bad economy is likely to lead to falling oil prices and that will reduce profit margins for the oil companies. A sector-specific issue for oil companies in France is that French officials could be planning to impose new taxes. A few new taxes are being proposed by various officials which include a hike on capital gains taxes, raising the dividend tax and even a specific tax that targets the oil sector. A recent Reuters article summarizes the new tax that could impact oil stocks, and it states:
"The tax, which the new Socialist government said would tap a sector whose margins have been boosted by the sharp rise in oil prices, will hit all owners of oil stocks in mainland France, from refiners to supermarket petrol stations and traders. The tax will amount to 4 percent of the value of average crude and fuel stocks owned in the last three months of 2011, the bill document showed."
For these reasons, it might still be too early to buy Total shares unless you are a very long-term investor. The European debt crisis has dragged on for years and some expect it to last a few more years with many twists and turns possible along the way. Profitable companies in France (especially oil) might be tempting targets as the government tries to find new sources of revenues and investors have to be prepared for that possibility, along with the chance for oil to decline.
Here are some key points for TOT:
Current share price: $49.98
The 52 week range is $40 to $57.06
Earnings estimates for 2012: $7.10 per share
Earnings estimates for 2013: $7.02 per share
Annual dividend: about $2.60 per share which yields about 5.3%
Data is sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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