Agfa Gevaert - Global Diversification For An Overvalued U.S. Market

May 29, 2015 11:37 AM ETAgfa-Gevaert NV (AFGVY)1 Comment
John Jenkinson profile picture
John Jenkinson
11 Followers

Summary

  • The euro exchange rate versus the US dollar has not been as good as this in over 10 years. The euro and the dollar have almost reached parity.
  • American investors looking to de-risk their equity portfolios should consider some European equities which are cheaper.
  • Agfa Gevaert is a reasonably priced capital goods stock with upside growth potential.

With the recent overvaluation in shares becoming evident, for both the NASDAQ and S&P500, the more savvy investors are looking to move some money out of an overvalued market - in both P/E ratios and Q ratio , and into a more "value friendly" market, European stocks.

The euro exchange rate versus the US dollar has not been as good as this, for the American investor, in over 10 years. The Euro and the Dollar have almost reached parity.

European Stocks are cheap, though the toughened cynics among you have already pointed out the euro currency area failing, debt defaults and anxieties over Russian expansionism - there are many markets which offer good value with favorable economic news, which has been performing well (by European standards) for the last decade. These include Germany, London and Belgium.

Western Europe is now the favored destination for many investors currently due to the favorable economic growth, and de-risking from emerging markets.

Agfa Gevaert (AGFB)(OTCPK:AFGVY)

Once a thriving consumer photographic equipment manufacturer and supplier, it has responded to the death of film by expanding into print solutions, health imaging and IT. It also has significant exposure to Non-Destructive Test (NDT) - so it is more of an industrial equipment and capital goods manufacturer than a basic chemicals company.

After being spun out of Bayer AG (OTCPK:BAYRY) in 2002, it had a rough few years and has entered value stock territory.

The company has reduced debt, is cash flow positive and is trading on excellent financial ratios:

The current ratio of 1.5 and a quick ratio of 0.9 is strong. With total debt of 126 million Euros - less than two year's free cash flow.

Receivable days average moved down from 56 days to 52 days which is a good achievement. Also good was the payables moving up from 42 days to 46 days - which for a capital goods company is about half what would be expected.

The revenues for full year 2014 were 2.6 Billion Euros, with a gross profit and operating income of 807 million Euros and 127 million Euros, respectively.

The main concerns for the balance sheet were a pension liability of 1.28 billion Euros, and falling earnings. Christian Reinaudo (CEO) stated that the European nations were not interested currently in investing in healthcare, due to austerity measures, and American radiology investment was stunted due to Medicare changes on rebates.

The defined contribution pension scheme is a risk, and without knowing the actuarial assumptions the claim of a €905 million deficit in pension obligations remains a risk.

The first quarter of 2015 had encouraging results with revenue of 622 million, and gross profit of 197 million.

Annual Quarterly
2014-12 2013-12 2012-12 2015-03 2014-03
Income Statement
Revenue 2,620 2,865 3,091 622 622
Operating Income 136 163 96 24 15
Net Income 50 41 -41 2 -1
Earnings Per Share 0.60 0.50 -0.48 0.03 -0.01
Diluted Average Shares 84 84 84 84 84
Balance Sheet
Current Assets 1,509 1,502 1,674 1,639 1,509
Non Current Assets 1,039 1,066 1,156 1,058 1,050
Total Assets 2,548 2,568 2,830 2,697 2,559
Current Liabilities 959 803 866 1,070 813
Total Liabilities 2,455 2,243 1,911 2,582 2,236
Stockholders' Equity 93 325 919 115 323
Cash Flow
Cash From Operations 151 107 32 53 31
Capital Expenditures -37 -40 -44 -8 -7
Free Cash Flow 114 67 -12 45 24

Downloaded from Morningstar

Summary:

The company can be purchased with the on the following valuation metrics (for the European listing, the ADR is more expensive)

Price to Book value = 0.7

P/E = 9

Leverage is low, and even including a premium for the pension deficit is not unreasonable.

I would rate this stock a buy, with estimated earnings for this year of 60 Euro cents a share on flat earnings of €2.6 billion. This is a quality stock .

With an aging European population and its healthcare portfolio, and exposure to growth markets worldwide including all the BRIC countries for printing and NDT and healthcare.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

This article was written by

John Jenkinson profile picture
11 Followers
John Jenkinson is a personal finance and investment nerd. He has also been variously described as a raconteur, author and investor

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.

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