By Premo Sewnunan
Britain is stuck in the doldrums with regards to economic growth prospects for the rest of this year and 2012. The British Chambers of Commerce cut its growth forecast from 1.9% at the beginning of the year to 1.1% recently.
To offset weak domestic spending, British companies are following in the footsteps of their US counterparts in looking to fast growing emerging markets to drive their earnings. The companies listed below are good examples:
AstraZeneca Plc (AZN): One of the world’s leading drug firms, formed via a merger in 1999 between the Zeneca Group from the UK and Astra from Sweden.
The stock price hovers about 10% above its 52 week low. Price/earnings ratio is 7.8 (trailing twelve months) and price/book is 2.79, a ten year low. On a price/earnings comparison, the company is selling for a song compared to GlaxoSmithKline (GSK) - 20.4, Merck (MRK) – 34.8 and Novartis (NVS) – 13.52. AstraZeneca tops its rivals in the gross and operating profit margins front as well.
The company’s products enjoy strong market share in the gastrointestinal, cholesterol regulation and anti-psychotic markets. That said, AstraZeneca is more at risk to US health care reform regulations than its rivals, as it has greater exposure in the US pharmaceutical industry.
For the near term, this stock is worth holding for its dividend yield. The company’s top three sellers account for over 50% of its annual revenues and by 2016, they will be faced with generic competition. This will hurt revenues and its dividend will fall unless management acquires a profitable generic drug maker or replaces its current top performers with drugs of the same ilk.
Smith and Nephew Plc (SNN): Smith and Nephew is involved in design, manufacture and marketing of medical devices for the orthopedic, endoscopy and wound care markets.
The company is currently valued at roughly $9 billion with a price/earnings multiple of 14.2 (trailing twelve months), almost on par with Stryker Corp (SYK) – 14.96 and Johnson and Johnson (JNJ) – 15.3 and well below the industry average of 22.4. Price/book ratio is 2.87, a ten year low.
US sales account for estimated 43% of total revenues with Europe at roughly 33%. The company is benefitting from the growth in the aging baby boomer population who require the company’s products for various treatments and procedures. Offsetting this is US healthcare reform in the guise of reimbursement rates which will weigh in on margins and weak demand due to a soft economy as people opt to delay treatments.
Recent results suggest that management is focusing cost savings, growth by acquisition and on emerging markets to fuel growth. Revenues climbed 12% year over year although trading profit slipped 3%.
Investors should monitor details of the company’s strategic plans in the coming months before committing funds.
Ensco Plc (ESV): Ensco is an offshore drilling company with rigs spread throughout the world’s major offshore oil fields. It owns the world’s second largest offshore rig fleet.
Ensco has been an acquirer recently. The $7.4 billion acquisition of Pride International enhances Ensco’s geographic presence and broadens its customer base. The effect of this transaction on the balance sheet is noticeable with debt-capital ratio jumping to around 30% from 4%.
Management has noted the increase in tender activity and contract awards in Brazil and West Africa which should improve demand for deep water drilling. The company has over $9 billion in order backlogs for deep water drilling, primarily due to the Pride acquisition.
Earnings can be volatile given the state of the oil/gas market, coupled with unforeseen changes in capital spending by its major customers and new deep water drilling regulations. Analysts seem divided over this stock with analyst firm, Macquarie upgrading the stock to outperform from neutral whilst Zack’s maintains its neutral rating.
British American Tobacco (BTI): British American is one of the world’s largest tobacco manufacturers with operations spanning Europe, Asia-Pacific, Africa and Latin America, amongst others.
The company is currently valued at $87.2 billion with a price/earnings multiple of 16.7, almost on par with rival Philip Morris International (PM) – 15.3
For 2011, British American has performed well. Its global brands have recorded double digit growth in most regions along with price increases which, in the current economic environment is a notable achievement.
British American is also on the acquisition trail, buying a privately held Colombian cigarette maker as it diversifies in order to offset lackluster growth in developed markets.
There are risks though- ongoing and future litigation and increased regulations as evidenced by new packaging laws which are slated to come into effect by September 2012. Investor reaction to the new rules was muted with share prices of tobacco companies being stable.
Diageo Plc (DEO): Diageo is a leading producer of premium alcohol brands including Smirnoff, Johnnie Walker and J&B.
Diageo is currently valued at $48.9 billion. Price to earnings multiple of 15.84 (trailing twelve months), much cheaper than SAB Miller (OTCPK:SBMRY) – 22.95
The company operates in an industry that is historically stable in terms of revenues. When people feel downbeat about the economy, they usually prefer to drown their worries in alcohol.
On the acquisition front, the company has strengthened its presence in emerging markets by purchasing either a controlling interest or an equity stake in emerging market producers. Diageo has substantial exposure to emerging markets and will continue to benefit from the strong following its brands command at the moment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.