Article / 15 January 2014 at 10:37 GMT

Overvalued European machinery industry offers few bright spots

Peter Garnry Peter Garnry
Head of Equity Strategy / Saxo Bank
Denmark

• Machinery sector shares propelled to unattractive levels
• Sector has become victim of its own success
• Possible nuggets include Georg Fischer, Andritz

By Peter Garnry

Machinery is one of the largest sectors in the Euro Stoxx 600 index with 27 stocks represented across many different countries. The average return on invested capital is quite good but the industry's success has pushed valuation to unattractive levels. Our quant model is only positive on four stocks.

Overvalued industry

Europe has a long and proud tradition in industrial machinery and the industry's 17.8 percent return on invested capital is a testimony to the strength and efficiency of the sector. However, success often breeds weakness and investors taste for machinery stocks have brought valuations to levels where the industry as a whole does not offer an attractive risk reward compared to other industries in Europe. This view is also reflected in the fact that our model has 17 negative views corresponding to 63 percent of the industry. Not all stocks are overvalued and in between small positive stories are hidden.

Euro STOXX 600 machinery industry

Georg Fischer - steady growth

Switzerland is known for precision and Georg Fischer delivers just that across three segments: automotive products, piping systems and AgieCharmilles (high-precision manufacturing). The company was hit hard during the financial crisis with a significant decline in its automotive products and high-precision manufacturing divisions which saw an almost 50 percent decline in revenue in just one year. The piping systems division is the stable cash cow in the company and has been less affected by the crisis and is already above previous peaks on revenue.

The strong Swiss Franc has caused headwinds for growth but the company is currently growing at stable rates around 3-4 percent per annum. Expectations for ROIC over the next 12 months are 11.3 percent and with a valuation of 1.5 on EV/IC (enterprise value to invested capital) the stock looks undervalued. The stock has a 20 percent upside potential.

Georg Fischer share price (the past year)

Georg Fischer share price  

Source: Saxo Bank

Andritz - the worst is over

Steady as she goes has hardly been the headline for Austria-headquartered Andritz, with the stock price fluctuating wildly over the last year. With seven quarters of earnings disappointment, investors' patience has been tested. However, the worst seems to be over now for the global provider of plants and services for the hydropower, pulp and paper and metals industries, and order inflow has bounced back in Q3. The market is expecting significant margin expansion over the next 12 months.

The latest decline in the share price is an opportunity to be long the stock. It also worth reminding yourself that this is a quality company with a 25 percent return on invested capital and phenomenal growth in the past underscoring its quality products. Revenue is expected to be EUR 5.7 billion in 2013 up from 940 million in 2000. The current share price offers an upside of around 11 percent.

Andritz share price (the past year)

 Andritz share price

Source: Saxo Bank

(mo)

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