3 Profitable European Stocks Among Mixed Messages from the Continent

3 Profitable European Stocks Among Mixed Messages from the Continent

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The EU released three major economic reports for the Eurozone last week. We took a closer look at the numbers. 

One of the many side effects of the ongoing government shutdown is that the Department of Commerce hasn't released any new economic data since September.

Every month, the Department of Commerce issues reports on the previous month's economic indicators, including retail and food sales, durable goods, and residential construction, sharing useful data that provides insight into the state of the US economy.

Thanks to the shutdown, that information will remain undisclosed for the foreseeable future.

The European Union, on the other hand, released three major economic reports last week: unemployment, retail sales, and inflation. Here's some of the data: 

  • August retail sales rose by 0.7% from July. 
  • But those sales were down 0.3% from August 2012. 
  • Unemployment in September remained at 12% for the second consecutive month.
  • This was higher than the 11.5% reported last September.

Inflation also fell by 0.2% from August to 1.1% on an annualized basis last month, compared to the 2.6% in August 2012. Additionally, the September level fell short of the European Central Bank's target of just under 2%.

And then on Wednesday the International Money Fund (IMF) released its World Economic Outlook report, in which it lowered its projected global economic growth but raised expectations for Europe. Citing weakening emerging market economies, strengthening advanced economies, and the challenges and risks of growth transitions, the IMF revised its global growth rate figures to 2.9% for 2013 and 3.6% for 2014.

The latest numbers reflect a 0.2% decrease from the institution's July forecast, and the new projection for 2013 is 0.3% lower than 2012's recorded rate. Meanwhile, Europe's expected growth for 2013 was raised from -0.6% to -0.4% while its rate for 2014 grew to 1% from 0.9%.

Investing ideas

We were inspired by the IMF's revised European growth rate and decided to take a closer look at high growth stocks within the continent. However, expected growth isn't guaranteed, so we added some additional screens that also analyzed past performance regarding profits.

To begin, we constructed a universe comprised of European stocks, which we subsequently narrowed down to those with with 5-year projected earnings per share (EPS) growth above 15%. We then screened that high growth group for stocks with increasing profitability. 

For the first profitability screen, we looked for stocks with increasing profits as illustrated by rising diluted normalized EPS for the last three consecutive years.

EPS refers to the amount of profit allotted per outstanding share of common stock. Diluted normalized EPS differs from normalized EPS by taking convertible securities into consideration. Examples of convertible securities include options, warrens, and convertible preferred shares that could be exercised as well as lower net income. As a result, diluted normalized EPS tends to be both lower and more conservative than normalized EPS. 

We returned to our group of high growth European stocks for our second profitability screen, this time looking for stocks with rising gross profit margins year-over-year for the last three years. Gross margin is the percentage of profit a company makes for each dollar it generates in sales, after deducting production expenses. Examples of these expenses include operating costs, payroll, and taxes.

Gross Margin = Gross Profit / Revenue

The higher the percentage, the greater the gross profits a company takes from its revenue. When a company has rising gross margins, it indicates that the firm is in control of its costs. 

For our last screen, we decided to take a look at liquidity. Sources of liquidity are crucial in sustaining company operations in the short term as well as in financing investment for longer-term growth. And while the IMF raised its 2013 growth rate for Europe, the negative number still implies a contraction for the economy.

Therefore, we decided to look for companies with high liquidity as indicated by a current ratio above 3. The current ratio is a liquidity measurement that illustrates a company’s ability to cover its short-term obligations. It's calculated as: 

Current assets (cash and accounts receivable) / Current liabilities (accounts payable and short-term debt)

For the most part, when a current ratio is below 1, it suggests that the company lacks sufficient liquid assets to cover its short-term liabilities if profits declined. A ratio of 3 or greater indicates that the company has at least 3 times the liquid assets to cover its obligations if profits fell.

We were left with three stocks on our list.

Click on the interactive chart below to view data over time.


Do you think these stocks will benefit from the latest EU economic data? Use this list as a starting point for your own analysis.

1. Trinity Biotech plc (TRIB, Earnings, Analysts, Financials): Develops, manufactures, distributes, and sells diagnostic test kits and instrumentation worldwide. Market cap at $474.9M, most recent closing price at $21.92.

Diluted normalized EPS increased from 0.14 to 0.17 during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31).

For the second time interval, diluted normalized EPS increased from 0.17 to 0.18 (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31).

And for the last time interval, the EPS increased from 0.18 to 0.19 (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

EPS growth over the next 5 years at 17.5%.

Current ratio: 7.30.
 

2. Altisource Portfolio Solutions S.A. (ASPS, Earnings, Analysts, Financials): Provides services related to real estate and mortgage portfolio management, asset recovery, and customer relationship management primarily in the United States. Market cap at $3.24B, most recent closing price at $139.99.

Diluted normalized EPS increased from 1.07 to 1.95 during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31).

For the second time interval, diluted normalized EPS increased from 1.95 to 2.77 (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31).

And for the last time interval, the EPS increased from 2.77 to 4.43 (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

EPS growth over the next 5 years at 20.0%.

Current ratio: 3.90.
 

3. ARM Holdings plc (ARMH, Earnings, Analysts, Financials): Designs, with its subsidiaries, microprocessors, physical IP, and related technology and software, as well as sells development tools to enhance the performance of high-volume embedded applications. Market cap at $21.8B, most recent closing price at $46.81.

Gross profit margins increased from 91.65% to 93.59% during the first time interval (12 months ending 2010-12-31 vs. 12 months ending 2009-12-31).

For the second time interval, gross margins increased from 93.59% to 94.37% (12 months ending 2011-12-31 vs. 12 months ending 2010-12-31).

And for the final time interval, gross margins increased from 94.37% to 94.47% (12 months ending 2012-12-31 vs. 12 months ending 2011-12-31).

EPS growth over the next 5 years at 22.45%.

Current ratio: 3.00.
 

 

(List compiled by Mary-Lynn Cesar. EPS data sourced from Yahoo! Finance. Gross margin data sourced from Google Finance. Quarterly sales data sourced from Zacks Investment Research. All other data sourced from Finviz.)

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