Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Neil Wilkinson, fund manager, Royal London European Growth Fund.
In Europe, the German elections are out of the way and economic data remains supportive. Leading indicators point to expansion, albeit at a more moderate rate than in America and China.
The weeks ahead will bring third-quarter company results, and a chance to see whether improving economic data has translated into better profitability. Here are three European stocks that are worth considering.
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Neopost (Paris: NEO) has been one of my top picks in 2013, and I've increased my position in recent weeks. The company operates in a global duopoly for franking machines and postal equipment. It dominates the European market, and is second in the US behind Pitney Bowes.
In the last two years, management has successfully diversified the business into related areas, such as parcel-management software, using a track and trace system. The firm's half-year results were excellent: organic growth in its new business lines was stronger than expected and fully confirmed full-year guidance.
The core franking business generates excellent cash flow, supporting a dividend yield in the region of 7%. Despite a strong run in the shares this year, it still trades on only 11 times forward earnings, a 10% discount to the broader market.
Nobia (Stockholm: NOBI) is the largest manufacturer and retailer of kitchens in Europe, with market-leading positions in Scandinavia, Britain and France, as well as smaller operations in Germany and Switzerland. Its key brands include Magnet, Hygena and Poggenpohl.
Following a period of overexpansion before the credit crisis, a new management team was hired in 2010 to cut costs. Management targets a 10% group-operating margin, which looks achievable, given that the company was making between 8% and 9% before the crisis, with a far inferior cost structure. Nobia has also already achieved over 12% in its domestic market.
With demand from consumers improving, the group target finally appears within reach. In this context, Britain is very important, accounting for over a third of group sales. The UK business returned to growth in the last quarter as the housing market showed some recovery and the government's Help to Buy policy kicked in.
Housing-market transactions still remain some 25%-50% below their peak across Europe, so the potential boost to profitability when volumes recover is significant. Earnings forecasts are rising, and the stock is only on 14-times forward earnings.
My third stock offers exposure to improving sentiment towards peripheral' Europe. Spain's economy has clearly improved over the last year, and its government bond yields have dropped significantly, both in absolute terms and in terms of yield spread over core European bonds.
The economic data has stabilised, some reforms have been undertaken, and there are tentative signs of growth. While some political risk remains, the situation is less volatile.
Against this backdrop, Telefonica (Milan: TEF), the incumbent Spanish telecommunications operator, is a key pick. Its operating performance improved in the second quarter, thanks not just to good organic growth in its Latin American business but also, importantly, to an improvement in its domestic business, where margins beat expectations.
Management continues to try to sell non-core assets, which will strengthen the balance sheet and put the company in a strong position to take part in industry consolidation in the future.
Neil Wilkinson is fund manager of the Royal London European Growth Fund.
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