There is a lot going on in France these days. The upcoming elections will be a great challenge for the French democracy, as voters are almost equally divided between Nicolas Sarkozy and Francois Hollande. Previous polls suggested that the incumbent president, Sarkozy, had a very narrow lead against the socialist candidate, Francois Hollande. Other presidential candidates Le Pen, Melenchon, and Bayrou are also expected to receive substantial votes in the first round. However, according to one of the most recent polls by BVA , almost 56% of the French voters are expected to vote for Hollande in the second round of the poll. The IFOP Poll also suggests Hollande as the favorite candidate for the second round.
According to Associated Press, the number one election issue has been the job creation in France. The problems in the Eurozone countries have negatively affected the French economy. The unemployment rate is relatively high, and overall economic conditions have deteriorated since the financial crises. The country was recently downgraded by Standard & Poor's. Its credit rating was lowered from AA+ to AAA in January.
The French equities also suffered from economic concerns. While U.S. markets have almost fully recovered from the crises, the French stocks are still trading near their peak-crises levels. In the last 5 years, the CAC 40 index, (which measures the capitalization-weighted measure of the largest 40 stocks in the Euronext Paris) has lost near 50%.
While the French economy still suffers from chronic issues, I think investors have over-reacted to bad news. After all, France is still one of the largest industrialized economies in the world, and the country still hosts several of the world's leading companies.
I have a tendency to be contrarian. Right now, it might be one of the best times to enter the markets. The high pessimism in the European markets has driven several French stocks to significantly lower levels. Based on my analysis, I noticed 5 French stocks that are trading on deep discount. The fundamentals for these companies look strong, offering an opportunity for contrarian investors. Here is a brief analysis of these stocks:
Total SA (TOT) - Watch for Big Moves
Total is among the top international dividend stocks. The oil giant offers a yield of 6.17% with a payout ratio of 41.77%. Total (TOT) is the French equivalent of Exxon Mobile (XOM) with double dividends. The company operates as an integrated oil and gas company worldwide.
Click to enlarge.
The stock lost 4% in this year alone. Its debt/equity ratio of 0.47 is lower than most other giant-sized oil companies. At the current prices, the stock is trading way below analysts' target prices. The mean analyst target of 62.68% suggest about 40% upside potential. I suggest keeping an eye on Total SA, as I expect it be an outperformer after the Euro crisis.
Sanofi (SNY) - Buy
Sanofi is among the top dividend stocks in Warren Buffett's portfolio. The stock yields 4.75%. The trailing P/E ratio of 13.16 might look little pricey compared to other French companies. However, it is one of the lowest among its peers. For comparison, Pfizer (PFE) has a trailing P/E ratio of 20.41.
The Paris-based healthcare company was formed in the year 2004 with the unification of Aventis and Sanofi-Synthélabo. In the last five years, shareholders experienced an EPS growth of 13.44%. This year earnings are expected to rise by an additional 2.77%. Sanofi's gross margin is 67%, net profit margin is 14%. I think Sanofi-Aventis can be an excellent diversifier in a yield-oriented portfolio.
France Telecom (FTE) - Buy
France Telecom is the largest telecommunication company in France, and third-largest in Europe. The company provides fixed telephony and mobile telecommunications, data transmission, internet, and multimedia services. The company was founded in Paris, France in 1990. As of April 19, FTE had a $35.71 billion market cap. The P/E ratio of the company is 7.09, and forward P/E ratio is 6.98 for the next year.
Traditionally, telecommunication companies have been among the best dividend payers in the market. France Telecom is no exception. According to Morningstar, the forward dividend yield of France Telecom is 13.2%, and the company will pay $0.89 dividend per share in May. Compared to U.S.-headquartered telecom giants, France Telecom is a dirt-cheap deal. It is trading at single-digit P/E ratios, and offers a double-digit yield.
Veolia Environnement (VE) - Buy
Veolia is one of the largest industrial companies in France. The company operates as a diversified utility company. It operates in water treatment, environmental recycling, energy, and transportation segments. Established in 1853, it is one of the oldest companies in France.
Veolia did not perform well in the last 5 years. Its earnings declined at an annual rate of 12%. However, analysts are pretty bullish on the future of the earnings. They expect double-digit growth rates. Veolia offers a yield of 12%, which is more than fully covered by the free cash flow. At the current prices, it is a dirt-cheap deal. The stock is trading below the book value.
Alcatel Lucent (ALU) - Buy
Alcatel Lucent is probably the most well-known company in this list. The acquisition of Lucent Technologies by Alcatel created the Alcatel-Lucent Company (ALU), one of the largest communication equipment providers in the world. Headquartered in the famous 7th arrondissement of Paris, the technology giant employs almost 80,000 employees with operations worldwide. Its shares are trading on both the Euronext and NYSE markets.
The stock is trading well below its heyday valuation. At the time of the merger deal, Lucent was valued at $13.4 billion, suggesting a market cap of $33.5 billion for the combined entity. The company's current market cap is only $4.46 billion. Sure, the company's earnings have suffered in the same period. However, the stock did not deserve to lose 66% in last year alone. The company is going through significant reorganization. The management expects a higher operating margin as well as a stronger net cash position by the end of this year. The smart phone proliferation is also expected to boost the upward trend in the company's software segment. The debt/equity ratio of 1.2 is a red flag, but the stock is trading with single digit P/E ratios. I think, the current price offers a deep bargain. An effective cost minimization, combined with the market expansion can easily push the stock back to its pre-recession levels.