Many strategists are making Europe sound great again as they dish out their 2018 picks.
It helps that valuations for the region’s stocks still aren’t that stretched. Another plus: The Organization for Economic Cooperation and Development expects the euro zone’s gross domestic product to grow by 2.1% next year, down from this year’s 2.4% rise.
As Russell Investments strategists write in a note, “Reflation, combined with the refutation of populist movements in the region, have laid the foundation for a self-sustaining recovery that could last for years to come.” The bulls from Russell describe valuations for Europe’s stocks as “neutral” and fundamentals as “strong,” adding that they “continue to favor euro-zone financial markets over U.S. markets in particular.”
Is there a European sector that might make for a particularly good bet in 2018? Transportation stocks are worth considering. The MSCI index that tracks shares of toll-road operators, shipping companies, airlines, and other transportation outfits has outperformed the broad market this year, with an advance that has topped 31%, note Deutsche Bank analysts. They expect more gains in 2018, thanks to another pickup in volume for these businesses.
“The macroeconomic outook looks robust in 2018 with our DB economists forecasting real global GDP growth of 3.8%,” write the bank’s Andy Chu and his colleagues in a note. “Volume growth across the sector is typically a multiplier of one to 1.5 times GDP, which suggests that market-volume growth should be around mid-single digits.” The bank’s top picks in the sector include Deutsche Post DPW, -0.27% , which runs global shipping heavyweight DHL and Germany’s postal service, and Vinci DG, +0.93% , with toll-road and construction units. The former is a GARP stock, that is, one that delivers growth at a reasonable price, say the analysts.
“We think that the company can deliver mid-single-digit organic revenue growth medium term, supported by structural e-commerce growth,” they write. Deutsche Post is “cheap,” with a dividend yield around 3%; they have a Buy rating on it and a price target of 45 euros ($53), about 13% above the recent €40. The stock, which is up about 29% this year, trades around 16 times forward-year earnings, below FedEx’s FDX, +1.05% multiple of 17 and United Parcel Service’s UPS, +0.20% 18.
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Deutsche Post’s valuation is “stuck in the past and not where it should be,” assert RBC analysts, who have an Outperform rating on the shares and a price target of €44. They add that 64% of revenue will come from DHL and other nonpostal units by 2025, and that the fading effect of more-traditional businesses argues for a higher multiple.
An attractive feature of Vinci is that the stock looks like half a growth play, half a steady Eddie. About 50% of its value is “underpinned by very resilient and predictable mature toll roads in France,” the DB analysts say. The company is also a bet on growth, thanks to its construction unit’s “more cyclical contracting activities,” they add, giving the shares a Buy rating and price target of €94. That target implies a modest rally of about 9%.
Raymond James analysts see bigger upside. They say that Vinci ought to build on this year’s gain of about 33% because its share price doesn’t yet reflect its “unique mix of defensive qualities; good growth potential; and notably, its capacity to create value through acquisitions.” They rate the stock Outperform, with a €100 price target.
Deutsche Bank’s two other top picks in transportation are International Consolidated Airlines Group IAG, +0.31% and rival Deutsche Lufthansa LHA, -0.61% , both of which have landed bullish mentions in this column this year (“British Airways’ Meltdown: Time to Buy IAG?” June 2, and “Deutsche Lufthansa Has More Room to Climb,” Oct. 21).
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It’s not all rosy. Deutsche Bank suggests one stock to sell. Royal Mail’s RMG, -0.34% management is performing well in the early phases of a modernization effort, they say, but the postal and delivery company nonetheless faces a difficult year. Chu and his colleagues put a price target of 359 pence ($4.79) on the shares, implying a drop of about 24%, which would add to this year’s fall of 4%.
“We think it will be more difficult for Royal Mail to modernize and take costs out of the business in an environment where GDP growth is weak,” they say, referring to a United Kingdom economy that the OECD expects to expand by just 1.2% next year. Other challenges include uncertainty over business confidence as Brexit talks continue, as well as ongoing mediation with unions over pay and pensions. Royal Mail’s leaders are “doing a fine job,” but “postal and parcels network businesses are highly complex and take many years to reconfigure and fully modernize,” they conclude.