The Italian Stock Market: A Value Based Filter

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Includes: ADARY, ARZGF, ASTLY, DNIFY, E, ENLAY, IRDEY, LUX, NTZ, SAPMY, STM, TI
by: Daniel Gilcher

Summary

Introduce the Italian stock market and its past performance.

Discuss country specific risks.

Provide a filter and data for 69 Italian companies trading in the US.

Find 9 companies passing our filter and being possibly interesting investment opportunities.

The Italian Stock Market

Italy's stock exchange 'Borsa Italiana' is based in Milan. Since 2007 it is part of the London Stock Exchange Group plc. It's most important index is the FTSE-MIB (Milano Italia Borsa), which consists of the 30 most traded companies of the country.

A look towards the past performance of the index will give us a good idea about the general condition of the Italian market. The comparison to its neighbor market, the German Dax 30, will help us to establish a relative euro-centric picture of the last months and years.

The five year perspective shows a significant underperformance of the Italian index in comparison to the Dax 30. The economy was hit hard by the Euro crisis and did not manage to recover from its impact.

If we look at the past twelve months, the picture looks quite different. Earlier this year the FTSE MIB outperformed the DAX and rose more than 20%, mainly on recovered political stability and optimism in the Euro-zone. Yet, once again, the Italian index suffered badly from the following downturn in the second half of the year. It seems likely for now, that both indexes will finish the year around the same relatively positive results.

Country Risk

A look at the country-specific CDs should provide a reliable picture of the inherent country risk associated with investments in Italian domestic companies. It stands currently at 143 bp. (Source: Deutsche Bank research)

The graph shows the default risk behaving oppositely to the index performance. Monetary policy in the European Union will very likely play a determining role in that matter. As the whole problem involves more than just the national economy of Italy, it is a rather complex issue, that would well deserve a separate article. However, it should be clear, that Italy's economy is exposed not only to the risk of EU monetary policy but also political instability. Italy shows the highest rate of governmental changes and early elections of all EU countries.

The important notion here is that Italy's economy as a whole is in a difficult situation and facing several downside risks, both politically and economically. Investors should keep these risks in mind, especially when focusing on companies that are highly dependent on domestic markets and demand.

Italian companies traded in the US

To reach an informative picture of the Italian equity landscape it should be mentioned that the Italian markets provide relative strong liquidity for their FTSE MIB 30 companies and beyond. This holds not always true for the American OTC markets. In consequence, investors should check the possibility of direct investment in the country. Such an direct approach must then be weighted against possibly higher transaction costs and fees.

The NYSE lists five ADR's trading on US exchanges:

  • Eni (E) - a large gas & oil producer
  • Luxottica (NYSE: LUX) - producer of renown eye-wear brands
  • Natuzzi (NYSE: NTZ) - a premium furniture producer
  • STMicroelectronics (NYSE: STM) - Europe's largest producer of semi-conductors
  • Telecom Italia (NYSE: TI) - A globally active telcom-company

The following general list shows the 64 Italian ADR's traded OTC in the US:

(Source: topforeignstocks.com)

The filter

To reduce the number of relevant companies in a thoughtful way, I decided to apply a couple formal requirements. The idea is, that with that framework based on the fundamentals of the companies here, we will be able to arrive at a reasonable number of potentially interesting companies who provide a generally sound set-up.

To pass the filter we require each company to pass at least 4/5 of our suggested thresholds. While the first three indicators aim towards the relative price level of the stock, the two other point refer to some general idea of prevalent earnings power and healthy corporate conduct.

  • Trading below 12 times earnings
  • Trading below 1.2 book value
  • Trading below 10 times OCF per share
  • Positive Earnings in at least 4 of the past 5 years
  • Dividend paid for all past 5 years

The companies

Here are the complete results for the 69 Italian companies traded in the US:

The following nine companies matched our criteria:

Asicurazoni Generali (OTC: OTCPK:ARZGF) is Italy's largest insurance company. The company also holds large stakes in German insurance businesses.

ARZGF Chart

ARZGF data by YCharts

Astaldi (OTC:ASTLY) is a globally active construction company.

(Source: bloomberg.com)

Autostrada Turin Milano (OTC: OTC:ADARY): The company is the builder and contractor of the Highway between Turin and Milano.

(Source: bloomberg.com)

Danieli (OTC: OTC:DNIFY): The company is the third largest supplier of equipment for the steel industry.

(Source: bloomberg.com)

Enel (OTC: OTCPK:ENLAY): This company is Italy's largest energy supplier.

ESOCF Chart

Iren (OTC: OTCPK:IRDEY): The company is a holding in the utilities sector.

(Source: bloomberg.com)

Saipem Spa (OTCPK:SAPMY): The business is engaged in the supply of equipment for oil companies. Saipem is closely related to Eni.SAPMY Chart

SAPMY data by YCharts

Eni (NYSE:E): The company is a large energy and oil supplier. E Chart

E data by YCharts

It is remarkable, that all companies are relatively large entities. This is likely due to their US listings (in comparison to smaller Italian companies, that are not listed abroad) and therefore reveals a methodological bias.

The energy sector is clearly over-represented. The low oil prices are surely playing a role here.

We are confident, that the selected companies are worth further research. The underlying fundamentals are quite strong in all cases. However, the rigid form of our filter has also likely sorted out certain companies, that might as well be interesting from a value investor's perspective.

Conclusion:

We provided an overview about the Italian stock market.

We offered an assessment of the current risks associated with investments in Italian companies: Political and currency risk. We therefore advise investors to conduct careful due-diligence before investing in Italian businesses.

We provided a value based filter for the nearly 70 Italian companies listed in the US.

We found 9 companies matching our criteria. The presence of many oil related companies is likely caused by the currently low oil prices. The inherent commodity risk deserves attention here.

Apart from that, we think the filter is a useful approach towards investments in the country. The presented companies are worth further research.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.