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As Baron Rothschild is once believed to have said, "The time to buy is when there's blood in the streets". And nowhere does the blood flow more freely today than in the European periphery. So this will be one of a series of articles which will cover the main stocks on that same European periphery, namely the stocks that constitute the Portuguese PSI20 Index, the Spanish IBEX 35 and the Italian FTSE MIB Index.

What I will do is go over each of the constituents of those indexes, explain what the companies do, how they're valued, how they compare to alternatives in the U.S. markets and how they are exposed to the dynamics at home. This should allow us to have an idea of how cheap some of these companies have gotten, if indeed they've gotten cheap. Obviously to trade some of these markets investors would need an account with a full-service broker.

I'll start with the Portuguese PSI20 Index. This index has the following 20 constituents:

  • Altri
  • Banco Comercial Português
  • Banco Espírito Santo
  • Banco BPI
  • Brisa
  • Espírito Santo Financial Group
  • EDP
  • EDP Renováveis
  • Galp Energia
  • Jerónimo Martins
  • Mota Engil
  • Portugal Telecom
  • Portucel
  • REN
  • Semapa
  • Sonae SGPS
  • Sonae Indústria
  • SonaeCom
  • Zon Muiltimedia


Altri (ALTR.LS)

Altri is a forestry products company; it has large forestry holdings, several paper pulp factories and a rather small power generation side business with EDP. Altri's activity is highly cyclical because of its paper pulp business. Traditionally, paper companies are highly integrated and only buy paper pulp for marginal needs, making the paper pulp market one that's subjected to wild price swings.

Altri exports 92% of its production. This means Altri isn't affected by a drop in Portuguese internal demand due to austerity measures.

Taking into account its earnings report for 2011, these are the multiples that Altri presents today (all values are in Euros):

For such a cyclical company, the debt seems excessive and all in all it doesn't look like an incredibly cheap opportunity. It still trades well ahead of book value, and due to the debt load, the EV/EBITDA comes in at 8, which is expensive. For comparison purposes, companies such as UPM-Kymmene Oyj (OTCQX:UPMKY) trade at cheaper or comparable multiples (8 EV/EBITDA, 0.6 price/book value) while acting in a less cyclical market (due to being an integrated paper maker). International Paper (IP) has a higher dividend yield (3.3%), is slightly cheaper on an EV/EBITDA basis (7.4) and a bit more expensive in price/book value (2), but again, it has an integrated paper making capability which Altri lacks.

What we can conclude here is that in spite of all the blood, Altri is not priced like an incredible bargain. At least not yet.

Banco Comercial Português (BCP.LS)

Banco Comercial Português, BCP, is the largest banking group in Portugal. It is thus exposed to the excessive debt of the Portuguese State as well as the Portuguese private sector (families and non-financial businesses). Whether the Portuguese banking sector will present value for its shareholders should be mostly a political decision. The Portuguese State will end up deciding how diluted the shareholders will be, or even whether to wipe them out.

Naturally, the Portuguese banking sector is entirely exposed to the internal demand dynamics resulting from the austerity measures.

Taking into account its earnings report for 2011, these are the multiples that BCP presents today (all values are in Euros):

As can be seen, although BCP is not presently profitable it's already discounting a lot of dilution yet to come (the very low price/book value implies this). It might happen that due to political decision, the dilution ends up not being catastrophic. Anyway, BCP trades at truly distressed levels.

An important detail - the largest shareholder on BCP is Sonangol, the Angolan State's Petrochemical Company. This might save the BCP shareholders from being too diluted by the Portuguese State.

For comparison purposes, we can see that Citigroup (C) also trades at a low price/book value ratio (0.41), though almost 4 times higher than BCP's. Of course, Citigroup's dilution is mostly or entirely in the past, where BCP's is still in the future.

Banco Espírito Santo (OTCPK:BKESY)

Banco Espírito Santo is another large Portuguese bank, thus subjected to the same pressures as BCP, since its assets are constituted mostly by the Portuguese excess indebtedness, be it State debt, or private (families, non-financial businesses) debt.

Naturally, the Portuguese banking sector is entirely exposed to the internal demand dynamics resulting from the austerity measures.

Taking into account its earnings report for 2011, these are the multiples that BES presents today (all values are in Euros):

BES also reported a loss for 2011, but it's likely that it will return to profits during 2012. However, as can be seen BES trades at a much lower discount than BCP. Indeed, BES trading at 0.32 times book value is rather close to Citigroup's 0.41 on the same measure, with Citigroup not being exposed to any of the dynamics and risks presently at work in the Portuguese market. It would thus seem that BES is not trading "distressed enough".

Banco BPI (BPI.LS)

Banco BPI is also a Portuguese bank, thus subjected to the same pressures as BCP and BES. Its assets are constituted mostly by Portuguese excess indebtedness, be it State debt or private (families, non-financial businesses) debt.

Naturally, the Portuguese banking sector is entirely exposed to the internal demand dynamics resulting from the austerity measures.

Taking into account its earnings report for 2011, these are the multiples that BPI presents today (all values are in Euros):

Again, BPI reported a loss for 2011 but it's likely that it will return to profits during 2012. BPI reported that its recurring earnings during 2011 would have been 115.9 million euros, which would have seen it present a P/E of 4.2 at today's quotes, if not for extraordinary impairments. Still, at 0.59 times book, BPI trades at a premium to Citigroup and Bank of America (BAC), which has a price/book of just 0.35, without all the grief that comes from buying into a Portuguese bank in the present circumstances.

Brisa (BRI.LS)

Brisa operates toll motorways. Although the business has some exposure to Portugal's internal demand dynamics - as the 5.2% drop in revenues from 2010 to 2011 shows - the motorway business is rather stable and tends to produce a lot of cash flow anyway (the EBITDA margin is 69%!). Indeed, that's probably the reason why Brisa is subjected to a takeover offer of 2.76 euros per share right now.

Taking into account its earnings report for 2011, these are the multiples that Brisa presents today (all values are in Euros):

The earnings were impacted by a one-off asset impairment during 2011. Still, with Brisa under an acquisition proposal, the stock no longer reflect all the blood flowing elsewhere, and thus can't become incredibly cheap.

Regarding comparable U.S. listed stocks, I am not aware of a pure toll road stock in the U.S., so there's nothing I can really compare it to.

(to be continued)

Source: Blood In The Streets, Portugal (Part 1)