3 Low P/E European Large Caps With Rising Gross Margins

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Includes: BT, CNH, LYB
by: Kapitall

European stocks recovered from their one-month low on Tuesday after Federal Reserve Bank of Atlanta President Dennis Lockhart affirmed the central bank's support of the stimulus. As Europe continues to watch the latest developments from the Fed, we decided to turn our eye to the European market. On Tuesday, an analyst from Vienna-based Raiffeisen Capital Management told Bloomberg that European equities are the most undervalued in the world, so we set out to find potentially undervalued European stocks, specifically those with strong profitability.

We began with a universe of European stocks, which we subsequently narrowed down to those with forward and trailing P/E ratios of 15 or lower. Low P/Es are attractive because nobody wants to overpay for good growth - although this number may indicate there is little growth at all. Coincidentally, the stocks that remained had trailing P/E ratios below or slightly above the iShares S&P Europe 350 Index (ETF) trailing P/E of 13.

Next, we looked for stocks with rising gross profit margins, as this can be an encouraging indicator of a firm's financial health. Gross profit margin is the profit that remains after deducting "cost of goods sold," which includes inventory. Companies with higher gross margins are considered more profitable and have a greater control of their costs. We collected data on annual financial statements, focusing solely on companies that have reported rising gross profit margins over the last four years (based on annual filings). For each stock, we describe the relevant time interval and change in gross margin.

The List

For an interactive version of this chart, click on the image below. Average analyst recommendation sourced from Zacks Investment Research.

Do you think now is the time to invest in these stocks? Use this list as a starting point for your own analysis.

1. CNH Global NV (NYSE:CNH): Distributes a line of agricultural and construction equipment and parts worldwide.

  • Market cap at $10.58B, most recent closing price at $43.66.
  • Trailing P/E is 8.67. Forward P/E is 8.32.
  • Gross profit margins increased from 13.96% to 16.55% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, gross margins increased from 16.55% to 17.89% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, gross margins increased from 17.89% to 18.88% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

In the first quarter of 2013, CNH Global reported $4.697 billion in revenue, which is a 1.25% increase from $4.639 billion in revenue during the same period in 2012. The equipment manufacturer had $443 million in operating profit from equipment operations, a 9.11% increase from $406 million last year. The company also saw an increase in first quarter diluted earnings per share with a 19.82% increase to $1.33 from last year's $1.11 diluted EPS.

CNH Global has returned 3.17% since May 6th. The equipment manufacturer's performance beats competitor AGCO Corporation (NYSE:AGCO), which returned 3.16%, and Caterpillar Inc. (NYSE:CAT), which returned -1.67% over the last month.

For the remainder of the year, CNH Global expect both its Agricultural and Construction equipment unit volumes to be flat to down 5%. However, the company expects revenue to rise by 5%, with operating margins between 8.5% and 9.0%. Additionally, in the recent earnings call, CEO Richard Tobin noted that the company's heavy buying season begins in the second quarter and lasts through the third quarter.

2. BT Group plc (NYSE:BT): Provides communications solutions and services worldwide.

  • Market cap at $35.67B, most recent closing price at $45.25.
  • Trailing P/E is 11.8. Forward P/E is 1.8
  • Gross profit margins increased from 76.93% to 77.85% during the first time interval (12 months ending 2011-03-31 vs. 12 months ending 2010-03-31). For the second time interval, gross margins increased from 77.85% to 82.15% (12 months ending 2012-03-31 vs. 12 months ending 2011-03-31). And for the final time interval, gross margins increased from 82.15% to 83.19% (12 months ending 2013-03-31 vs. 12 months ending 2012-03-31).

BT Group's fourth quarter of 2012 ended on March 31, 2013. The telecommunications company's revenue fell by 1.8% from last year's £4.88 billion to £4.79 billion. Net profit also fell, declining by 6.3% to £591 million from £631 million. Adjusted EPS rose by 22.34% to £0.79 from £0.64 a year ago.

BT Group has recorded great gains over the last month, when compared to its closest competitors. The stock returned 5.26% since 5/6/13, better than Nippon Telegraph & Telephone Corp. (NYSE:NTT) and China Telecom Corp. Ltd. (NYSE:CHA), which returned 2.21% and -4.79% during the same holding period.

Investors should note that BT Group has a low short float compared to industry averages, which suggests that short sellers may see limited downside in the stock. The telecommunications company's short float stands at 0.01%, much lower than China Telecom Corp. Ltd. (short float at 1.44%, representing 3.87 days of trading volume) and Telefonica, S.A. (NYSE:TEF) (short float at 0.23%, representing 1.65 days of trading volume).

May was a busy month for BT Group. At the beginning of the month, the company delivered a blow to BSkyB's dominance of British sports broadcasting by winning a three-year deal to show 38 Premier League soccer games. BT Group followed up that win with another deal later that month, this time in China. The company is designing a centralized IT platform the General Hospital of Ningxia Medical University, which is part of the Ningxia General Hospital Group's 27-institution network.

3. LyondellBasell Industries NV (NYSE:LYB): LyondellBasell Industries N.V. manufactures and sells chemicals and polymers, refines crude oil, produces gasoline blending components, and develops and licenses technologies for production of polymers.

  • Market cap at $38.74B, most recent closing price at $67.31.
  • Trailing P/E is 12.44. Forward P/E is 9.45.
  • Gross profit margins increased from 4.26% to 9.65% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31). For the second time interval, gross margins increased from 9.65% to 11.26% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31). And for the final time interval, gross margins increased from 11.26% to 12.73% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

During the first quarter of 2013, LyondellBasell Industries' revenue decreased by 9.08%, resulting in $10.669 billion in revenue compared to last year's $11.734 billion. The company reported $900 million in net income, a 50.25% year-over-year increase from $599 million. Diluted EPS climbed to $1.55, reflecting a 49.04% jump from the company's $1.04 diluted EPS in the first quarter of 2012.

LyondellBasell Industries NV has recorded great gains since May 6th, when compared to its closest competitors. The stock returned 8.25% over the last month, besting Sigma-Aldrich Corporation (NASDAQ:SIAL) and PPG Industries Inc. (NYSE:PPG), which returned 6.46% and 2.63%, respectively.

Low natural gas prices in the U.S. have been extremely beneficial for LyondellBasell, as the company CEO Jim Gallogy notes that the olefins industry outside of North America continues to have an adverse effect on the company's European olefins and commodity polyolefin businesses. Investors interested in LyondellBasell should keep an eye on European naphtha, since the cost of the raw material has been volatile this year.

*Profitability data sourced from Fidelity. All other data sourced from Finviz.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Kapitall is a team of analysts. This article was written by Mary-Lynn Cesar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.