Three European stocks set for sustainable profit growth

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published 22 July 2024

Our investment philosophy is to look beyond the economic and political noise to find continental European companies that can deliver superior returns over a three-to-five-year horizon. We look for firms that can deliver sustainable dividend growth, as history shows us that this characteristic is a marker of quality that can help to identify stocks likely to outperform the market. We seek to build a balanced portfolio and look for the best companies across sectors, favouring stocks with strong balance sheets, pricing power and a robust competitive position.

Top European stocks to invest in

Sweden’s Epiroc (Stockholm: EPI-B) is a global leader in underground and surface rock drilling. The company operates in an oligopolistic market and benefits from a very strong competitive position. Epiroc is well placed to capitalise on future commodity booms fuelled by long-term trends such as electrification and the growth of infrastructure. Meanwhile, a decline in the quality of ore is leading to a shift towards underground mining, which benefits Epiroc more than its peers owing to its superior product mix. The group’s customer base is extremely fragmented, which creates pricing power, and Epiroc also enjoys the benefit of repeated part replacements. As mining becomes more complex, Epiroc should be able to pass through higher prices and increase volumes. Epiroc is cash-generative and has low net debt, with an attractive and sustainable dividend. Given these positive fundamentals, we anticipate that Epiroc will be able to deliver high single-digit organic growth over the next five years.

Ryanair (Dublin: RYA), Europe’s largest low-cost air carrier, is the strongest player in a highly commoditised market. It has the best cost-management discipline of all European airlines and has historically delivered industry-leading returns on equity. The company has been the main European beneficiary of the post-pandemic recovery in demand for air travel as other suppliers (such as Wizz and Vueling) have struggled to boost supply due to their reliance on the delivery of new aircraft. This has supported pricing. Having stopped paying dividends during the Covid pandemic, Ryanair has recently announced a new dividend policy and share buyback programme. Emboldened by a secure balance sheet (the company has no debt) and high levels of cash generation, management has signalled its confidence in the firm’s ability to fund both buybacks and a progressive dividend policy.

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Bankinter (Madrid: BKT), a Spanish domestic bank, is an example of where we like higher quality, best-in-class companies that operate in an otherwise average market. Management has a strong record of capital allocation and the business pays an attractive, mid-single-digit dividend yield. The shares are highly sensitive to interest rates, but we think the long-term outlook justifies this potential volatility. Bankinter is one of the few banks in developed markets where we see genuine opportunities for organic growth, thanks to its client mix and focus on high-net-worth individuals, along with the backdrop of consolidation and restructuring happening in the wider Spanish market. This enables Bankinter to gain new clients through attrition as other players combine. Meanwhile, management has been investing in emerging operations in Portugal and Ireland to drive future growth.

Marcel Stotzel joined Fidelity as an analyst in 2014. He initially covered US tech as an MBA intern, before being hired full-time to cover European Software and IT services and thereafter European Aerospace, Defence and Airlines.

After a highly rated period in research, Marcel was promoted to Portfolio Manager and he has co-managed the Fidelity European Fund and Fidelity European Trust PLC since August 2020.

Prior to joining Fidelity, Marcel worked as an investment banker at Barclays. Marcel holds an MBA (INSEAD), is a CFA charter holder and graduated with a Business Science (Hons) in Finance from the University of Cape Town.