Four Top Picks in European Market

Time for another look at how some previous Buy-recommended picks from Zacks senior European market analyst Santiago Burgaleta, CFA. We found out why he does or doesn’t think these companies deserve a continued bullish forecast.

In the U.S. agriculture stocks have been gaining due in part to higher pricing. Do you find the same thing with a European agriculture company like Syngenta?

Sure. The long-term positives of Syngenta’s (SYT) business model are backed by short-term catalysts. We remain buyers of Syngenta AG, and have increased our target price to $65.00. The depth of its product mix, robust business model, and highly regarded management team support our positive view on the stock.

We believe Syngenta is one of the safest plays on the sector, which should be reflected in higher valuations, and we remain confident in management’s execution capabilities in cost cutting. Potential for rising pay-outs should not be overlooked by investors.

The company was a result of the de-merger of Novartis agribusiness from Novartis AG (NVS) and of Zeneca agrochemicals business from AstraZeneca PLC (AZN). The businesses combined in November 2000 to form Syngenta. The company's combined major research and manufacturing operations are located in over 20 countries around the world.

How are you currently valuing Syngenta shares?

Syngenta is trading at 23.7x our 2008 EPS estimate. We think its discount to Monsanto (MON) is still unwarranted. We are aware of Monsanto’s efforts and progress in Genetic Modified seeds versus Syngenta’s, which have lagged, but a 70% premium valuation is still difficult to justify.

We believe Syngenta should trade in the 27.0-30x range, which yields a target price of $65. The discount to its peers has become a premium as the growth prospects for the company and earnings stability drive valuations higher, but still trades at discount to its most direct peer, Monsanto. The stock may be more volatile going forward as the premium valuation is digested by investors, but we believe there is room for a move higher.

Another strong industry remains oil & gas. How does Total fit in with the current sector outlook?

We had maintained our Buy rating on Total ADRs (TOT) after the company reported first quarter results. We continue to like the company for its positive production-growth profile, attractive returns and an improving outlook for the refining and chemical businesses. We also like the company’s active share buyback program and the recent increases in the dividend.

Growth in production now is higher than its peers, and we expect momentum to accelerate in the coming quarters. We increase our price target to $95 as market risk premiums fall.

Are you still bullish on the oil & gas industry overall?

We see our outlook for the integrated oil industry to be positive. The performance of stocks in this group reflects the outlook for oil and gas prices. After making record highs in the recent past (in nominal dollar terms), crude oil prices have eased to some extent, but still remain way above historical levels.

That said, we are maintaining our Hold recommendation on Eni ADRs (E). We are increasingly concerned with Eni’s high valuation, relative to its historical norms and as production growth slows, the stock could come under significant pressure.

Finally, what is your outlook for France Telecom?

We remain buyers of France Telecom ADRs (FTE). Improved free cash flow visibility over the next six months combined with an attractive and safe dividend yield suggest that price momentum may continue, driving the stock to new highs. The main investment thesis for FTE is P/E multiple expansion, which has been dramatically taking place.

France Telecom is trading at 13.0x our revised 2008 earnings per ADR estimate, which is a discount to the average telecom operator. We believe the discount should narrow, given France Telecom’s dominant position in the French telecom market (both fixed and wireless), and the potential for dividend increases although to a lesser extent now.

Santiago Burgaleta, CFA is a senior analyst covering the European markets for Zacks Equity Research.