Why IG likes CSL and Unicredit
UniCredit (UCG, Italy)
I like the idea of getting exposure to Italy, and although the political situation in Italy and the broader European region is always a concern I like the improvement I am seeing in the economy. Italy has put through some far-reaching reforms and is likely to grow by 0.7% this year and 1.5% in 2015. Unemployment is high but should start to head lower from here, while the benefits of cheap fuel and a more competitive euro should assist.
The kicker of the European Central Bank's quantative easing directly feeding into the banking system is always a positive and the bank's current asset purchases of €60 billion ($90 billion) a month could be increased if the euro moves progressively higher on a trade-weighted basis.
Looking at the market on a bottom-up basis, UniCredit (UCG), the global financial services company, looks compelling to own at a share price of €5.90 ($8.90). As well as working within a more favourably macro backdrop, Italian banks are seeing manageable costs and improving trading income and asset quality. In the recent second-quarter report, UniCredit beat the market's net operating profit consensus by 10%, with a 0.3% improvement (quarter on quarter) in its tier-one common equity.
The 12-month earnings multiple is 14, which is a discount to the long-term average, and for that you get 12% earnings growth (rising to 27% in 2017), with improving revenue and return on equity.
While the Australian investment community is in love with this stock, I feel they are correct and buying into it at $85-$90 is a cracking investment. Valuations have come back to more compelling levels, and at 21 times forward earnings this is now more in line with the longer-term average.
Naturally there are risks and these seemingly have become more apparent after the recent earnings report. These include a slowdown in immunoglobulins, price competition and an increase in investment ahead of new product launches. However, CSL continues to support the share price through capital returns and the prospect of product launches from late 2016 into 2017 suggests the earnings momentum will soldier on.
CSL is an excellent business at the right price and one I believe institutions will be more than happy to own (on current news flow) below $90.
Chris Weston, chief market strategist, IG