Are there value opportunities in Europe? – 3 share ideas

Airbus

Airbus builds aircraft using thousands of different parts from companies all over the world, so healthy supply chains are key to operations. Any major setback could have serious knock-on effects on delivery, profits and cash flows. This isn’t a small risk, and the picture can change quickly.

There have been hiccups with one of the engines used on some of its commercial aircraft, but fixes are in the works, and it’s not expected to have a big impact on operations. Aside from this, supply chains are in good shape and aren’t expected to hold production back.

Airbus delivered 735 commercial aircraft in 2023. This is ahead of both market expectations and its own guidance. That’s set to rise to 800 in 2024, which would mark a return to around 93% of pre-pandemic levels.

This comes as airlines are looking at upgrading fleets after several years of COVID-19 related underinvestment. Record levels of orders in 2023 pushed Airbus backlogs to more than 8,500 planes, and some models are sold out into 2030. That’s helping underpin market forecasts that revenue can grow from 2023’s base of €65.4bn to €91.7bn by 2026.

We think Airbus is in first place against its next biggest competition, Boeing. High barriers to entry keep outside competition at bay, while recent high-profile and tragic incidents have caused long-lasting reputational damage to Boeing.

Production freezes at Boeing mean airlines have been placing more orders with Airbus. That’s helped push its market share of narrow-body planes above 60%, and we think there’s scope for further gains.

Airbus also has both a Helicopter and a Defence and Space (D&S) division. These small slices of the pie, make up just 12% of 2023’s €5.8bn underlying operating profit. Performance in D&S is still disappointing, with margins below a lot of its peers.

The balance sheet is in great shape, with a net cash position of €10.7bn. We think this gives scope to increase dividend payments, with only a 1.7% forward dividend yield currently on offer. But as always, yields are variable and shareholder returns aren’t guaranteed.

Barring any major supply chain issues or global events limiting travel again, we expect a steady ramp-up in aircraft deliveries. And this could potentially feed into an increased valuation.

With limited competition, record demand and good pricing power, the current business conditions look favourable. But there are no guarantees and some turbulence along the way can’t be ruled out.

Siemens

Siemens, the global technology powerhouse has a finger in lots of pies, like energy infrastructure, transportation, and healthcare. We think it’s an eclectic mix of great businesses.

Supply chain issues over the last few years had led to Siemens customers increasing their orders and inventory levels. But much higher interest rates have reversed this trend in 2023, denting demand and causing some tough comparable periods for the group.

Sales to China are still weak, with the country’s slowdown worsening because of its real estate crisis. The outlook remains unclear in the near term, and until demand picks up again, it’s likely to stay a drag on group performance.

Markets aren’t expecting Siemens’ revenue growth to shoot the lights out, with mid-single-digit growth expected for each of the next three years. But this growth looks pretty strong to us, given how vital a lot of the group’s products and services are.

The healthcare division sells a diverse range of diagnostic and therapeutic tools and services. Demand for healthcare tends to stay strong even in times of economic difficulty. This and an expanding and ageing global population mean the growing healthcare market looks set to play right into the group’s hands.

Siemens’ Smart Infrastructure (SI) division focuses on the transition from fossil fuels to renewable energy, which could be positive with a lot of governments trying to fulfil net-zero pledges. Together, these two relatively resilient divisions made up more than 50% of the group’s €18.4bn revenue in the first quarter.

The Digital Industries (DI) division is involved with all things automation, improving supply chain flexibility and helping products get to market as quickly as possible. It’s been falling behind lately. But looking through the near-term softness, orders are starting to pick up again and should feed through into revenue later in the year.

Siemens trades towards the bottom end of its peers on a price-to-earnings basis, even with stronger growth, margins and free cash flows. That feels unjustified to us given the strengths of the underlying businesses. Although, there are no guarantees that market prices change to reflect that view in the near future, if ever.

Volvo Group

Volvo Group isn’t a car company – that was sold years ago – Volvo Group is a truck and industrial equipment giant. There are millions of Volvo trucks, buses and machines rumbling around.

The essential nature of Volvo’s products has helped fourth-quarter sales rise 8% to SEK148.1bn (ignoring the impact of exchange rates). Impressive operational progress helped underlying operating margins and profits rise, despite supply chain issues and higher costs.

Volvo is also a leader in the electrification of heavy-duty vehicles, like trucks and buses. Volvo wants over 35% of its vehicle sales to be electric by 2030. We see it being a front-runner for sustainable haulage as a real plus point.

Volvo doesn’t just produce vehicles, it services them too. And a 24/7 global support network is a serious selling point.

This recurring revenue stream tends to be resilient to economic ups and downs. It only accounts for a small slice of total revenue right now, but it’s expected to grow to over 50% by 2030. With more of the group’s products making their way into customers’ hands, we think this is achievable.

The steadier style of Volvo’s revenue helps support its ability to pay dividends, with a healthy 4.5% forward dividend yield. But as always, nothing is guaranteed.

For all the positives, we caution that Volvo’s fortunes are tied to the level of global economic activity. There are signs that customers have become more cautious, and the downturn in the Chinese property market has dented demand, contributing to a double-digit drop in truck orders.

This isn’t a Volvo-specific problem, but buyers’ nervousness isn’t likely to go away in a hurry. In the case of a worse-than-expected slowdown, we can’t rule out another drop in demand, which would likely hurt the valuation.

All in, we see Volvo as a ‘steady-Eddie’ with long-term growth potential. Recent operational progress has been outstanding, and despite current macroeconomic challenges, we expect that to continue. But ups and downs along the way can’t be ruled out.