Searching for the Ideal Opportunity in European Equities

Álvaro Guzmán de Lázaro Mateos presented his in-depth investment thesis on BMW-preferred (Frankfurt: BMW3), Dassault Aviation (Paris: AM), Schindler Holding (Zurich: SCHN), Acerinox (Madrid: ACX), ArcelorMittal (Amsterdam: MT), CIR (Milan: CIR), Esprinet (Milan: PRT), SOL (Milan: SOL) and Tesco (London: TSCO) at European Investing Summit 2013.

Three ideas “investable on their own”: Sustainable ROCE – difficult to copy (barrier to entry); owner-operators good both at operations and capital allocation; little or no debt; value is growing. But these stocks are up a lot and provide less upside potential.

BMW-preferred: Stock under 6x near-term P/FCF, or 4x P/FCF14e. At 10x FCF14e worth 98/share or 60% upside.

Dassault Aviation: Stock under 8x P/FCF14e, 13% FCF yield 14e. Limited upside (target 1256 or 42% upside @15x15e).

Schindler Holding: Trades at 13x P/FCF14e and under 11x 2015e. Target 177/share, or 40% upside (17x FCF15e)

Six ideas “to be judged as a basket:” Share prices are down a lot (SOL an exception), stocks look cheap and have a lot of upside potential, and have owner-operators at the helm (TESCO a question mark). But these stocks generally possess either no greatness or provide no comfort (due to debt) to investors. Investing in these stocks is largely a bet on mean reversion rather than long term value creation.

Acerinox: Share price is down >60% in 2007-13; big upside potential.

ArcelorMittal: Share price is down >80% versus 2008; big upside potential.

CIR: Share price is down >60% in 2007-13; 60-70% upside potential.

Esprinet: Share price is down ~70% in 2007-13; 40-50% upside potential assuming Italian operations normalize at an EBIT 40% lower than the 2008 peak. Very conservative assumption as they remain leaders and the market will recover sooner or later. A mid-way recovery of Italian EBIT to 2008 levels would increase the upside to 100%.

SOL: 80% upside potential applying peers Air Liquide/Linde’s multiples, which may never be attained except in an acquisition.

Tesco: ~30% share price fall in last five years; 40-50% upside potential.

About the instructor:

Álvaro Guzmán de Lázaro Mateos began his career in 1994 as an auditor for Arthur Andersen (Madrid), doing a full-time 6-month internship. He continued his career at Bankers Trust in Paris, where he eventually headed the Middle Office at the early age of 21. In 1997 he started as a stock market analyst at a Frankfurt fund management company (Value Management) founded by a former employee of the legendary Peter Lynch. During this period he studied and applied the value style of Ben Graham, Philip Fisher, Warren Buffet, Peter Lynch… Subsequently, he returned to Spain, where he worked as a financial analyst at Spanish broker Beta Capital and later Banesto Bolsa. In March 2003, he joined Bestinver to work with Francisco García Paramés, with whom he had frequently exchanged investment ideas since 1998, given their common liking for the “value school of investing”. He took a double French/Spanish university entrance exam, gained an MA in European Business Studies, and a Law degree from the UNED (Spanish open university). He became a Chartered Financial Analyst (CFA, AIMR) in 2001. Alvaro speaks Spanish, French, English and German. In 1999, he became a professor of fundamental analysis at the Spanish Insitute of Financial Analysts (IEAF) and at the IEB (Stock Exchange Study Institute).

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