Investing

10 Credit Suisse Top European Stock Picks for US Investors

Jon C. Ogg

Published: September 19, 2017 11:45 am

Last Updated: January 12, 2020 8:02 am

The U.S. stock market is currently sitting at all-time highs, and investors have to keep in mind that this bull market is now nearly nine years old. For about five years now, investors have managed to find myriad reasons to buy their favorite stocks on every major market pullback. Many of those same investors are searching for new ideas for income and profits for the year, or years, ahead.

There are many other markets outside of the United States for investors to consider. One area for more conservative investors seeking gains and income is in the more established companies located in Europe. After all, some of these companies are as large or strong as their American competitors and counterparts. Many investors feel their books are more understandable than stocks in many of the emerging markets. And there are many of these that have U.S. operations and employ many Americans.

Credit Suisse has updated its top 104 stock picks for Europe, and many of these companies have actively traded American depositary shares (ADSs) in New York for U.S. investors. These are the firm’s top picks across all of its covered sectors, and each analyst team has identified its highest-conviction ideas relative to the firm’s coverage universe. These so-called top picks were limited to 20% of the coverage universe on average.

24/7 Wall St. has perused this giant list and selected 10 of the top 104 companies featured by Credit Suisse, and the top criteria among these picks is that each of these companies have actively traded ADSs. For each of these top picks, there is a blurb or a consolidated part taken from the Credit Suisse upside thesis.

We have also included basic trading data on each, but the references made herein are in dollars rather than in euro. A rounding of the projected upside for each name is included as well, with the base case and the firm’s “blue sky” upside (if available), that is if everything goes above and beyond expectations.

One potential added benefit here among European stocks for U.S. investors is that the weakness in the U.S. dollar will add to dollar-based returns ahead if that same dollar weakness persists. Quite simply, a rising foreign currency against the U.S. dollar would imply that an underlying ADS in New York would rise in value even if the underlying stock has no price change on its local markets in Europe. Some of these companies are based in England, so the dollar versus the pound has to be considered rather than the dollar versus the euro.

Investors should also note that Credit Suisse says these should be considered as a starting point for further analysis rather than just taken solely in these calls. Here are 10 of the 104 top picks among the European equities from Credit Suisse.

Nokia Corp. (NYSE: NOK) was one of two top picks among the hardware and semiconductor picks. The firm sees 17% base case upside if its call is right, and Credit Suisse has a blue sky upside of about 37%. Those figures do not include any future dividend payments. Credit Suisse touted three main reasons why Nokia is a top pick with stronger EBIT margins coming in 2018:

• Ongoing cost savings
• Potential stabilization in Networks top-line going into 2018
• Further opportunities to monetize IPR/patents

Vodafone Group PLC (NYSE: VOD) was one of the two top picks in telecommunication services. Credit Suisse sees almost 20% upside in Vodafone, and it said:

Vodafone has rebuilt some competitive advantage in mobile network through Project Spring. As a result it has slowed its loss of market share in Europe. The overall mobile market is also relatively stable, with price erosion offset by rising demand for data (Gigabytes). Vodafone is cutting costs which should create some margin expansion in the coming 12 months to 24 months. An improvement in network has also lowered churn, reducing the need to spend on sales commissions and device subsidies. Vodafone is also likely to continue to take market share in fixed line.

Diageo PLC (NYSE: DEO) was one of three picks in consumer staples, because you know the Europeans and Americans alike are going to pound down booze whether they are happy or sad. Credit Suisse sees 13% upside here in its base case. The top picks report said:

We forecast a returns inflection point after a three year decline led by the faster growth Scotch and India operations – there is scope to unlock value through a beer disposal. It’s Scotch returns should accelerate as demand improves, investment requirements ease and on FX tailwinds.

Royal Dutch Shell PLC (NYSE: RDS-A) was one of the two integrated oil and gas top picks at Credit Suisse. Credit Suisse sees almost 17% upside in its model case for Shell, without its dividend considered. The report said of Shell’s transition:

The NewCo will be a less capital-intensive version of its former self with greater scale and scope around key focus areas and will allow it to re-prioritize investments and derisk the dividend.

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Barclays PLC (NYSE: BCS) was one of the seven top Outperform picks among the seven European banks with active ADSs traded in New York.  Barclays was given over 31% upside at the base case projection, if Credit Suisse is right here. Some of the reasons included in Credit Suisse’s investment synopsis for its top picks universe were as follows:

• Risk is firmly to the upside.
• Offers the strongest rerating potential among U.K. banks at 0.7 times its tangible net asset value.
• The market assumes cost-of-equity returns are impossible for Barclays.
• Expects improvement for the core bank with 8% return on tangible equity.
• Expectations for the investment bank remain very low.
• Corporate & Investment Bank consumes about 60% of the capital but accounts for just one-third of Credit Suisse’s fair value for the group.
• Management seeks to reallocate low-return capital to the markets business and to optimize liabilities.

Shire PLC (NASDAQ: SHPG) and Sanofi (NYSE: SNY) were the two top picks in European pharmaceuticals. The upside was represented at the base case to be up 35% for Shire and 16% for Sanofi.

Credit Suisse described Sanofi:

Sanofi shows one of the highest potential upsides across all the valuations of EU Majors. The base business, outside of diabetes, is continuing to perform as expected, with strong cash generation. Sanofi has a very strong position in rare diseases, multiple sclerosis, vaccines and from 2017 is No. 3 in OTC healthcare.

On Shire, the top picks report said:

Shire trades on a discount to European major pharma peers on PharmaValues EV/NPV. Shire effectively doubled in size with the acquisition of Baxalta adding an easily integratable rare disease business and blood fractionation business where synergies will be more difficult to achieve. We expect continued growth from key product Vyvanse from the adoption of binge eating disorder and the strong launch of Xiidra (lifitegrast) in dry eye.

Ryanair Holdings PLC (NASDAQ: RYAAY) was one of the three top picks in transports and logistics at Credit Suisse. The firm sees 23% upside to its target. Some of the logic behind the Ryanair pick was as follows:

• Ryanair’s market power.
• The Credit Suisse model shows that about 40% of competitor seats cost three times Ryanair’s expected 2018 fares.
• It can grow through taking market share from weaker competitors.
• Price convergence in Europe is growing.
• The price premium achieved by EasyJet over Ryanair has been low.
• While pricing is likely to remain under pressure in the near term, periods of extreme uncertainty have historically provided big opportunities for Ryanair.

ArcelorMittal S.A. (NYSE: MT) and Rio Tinto PLC (NYSE: RIO) were two of the five top picks among European metals and mining. ArcelorMittal’s projected upside is roughly 15%, and Rio Tinto was shown to have upside of 14% at the base cases, not including dividends.

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On Arcelor Mittal, the report said:

Drivers include positive macro signs for the stock and uplift in steel and iron ore prices. Also, the company’s action plan of targeted cost savings of $3 billion by 2020. Lower Chinese exports: Stronger domestic demand in China and hence lower exports will help domestic steel players. Furthermore, protectionist measures in the US and EU will curb imports.

On Rio Tinto the firm said:

We see equity and macro conditions aligning for Rio as Chinese credit conditions are now more accommodative and we expect a supportive economy ahead of the leadership transition through 2017…. The key drivers of Rio Tinto’s earnings are iron ore prices and Chinese and global steel market production.