Saint-Gobain 2 Billion Euros Show CEOs May Salvage Equities
Companies in Europe are boosting spending on plants, computers and equipment for the first time in four years, a sign to investors that stocks will overcome the region’s sovereign debt crisis as economic growth builds.
Fixed investment in the 17 countries sharing the euro will rise by 2.2 percent in 2011, according to forecasts from the European Commission. Graham Bishop of Royal Bank of Scotland Group Plc, whose call for a 7 percent gain in the Stoxx Europe 600 Index last year was the most accurate among strategists tracked by Bloomberg, says higher corporate spending will push the measure up 19 percent through the end of this year.
Rising investment at companies from Infineon Technologies AG (IFX) to Cie. de Saint-Gobain SA shows confidence among chief executive officers even as European governments struggle to pay debt and the U.S. economy shows signs of slowing growth. Corporate spending had its largest increase of the previous decade in 2006, when the Stoxx 600 advanced 18 percent, data compiled by Bloomberg and the European Commission show.
“We’re seeing a continuation of the improvement that started in 2010,” Saint-Gobain Chief Executive Officer Pierre- Andre de Chalendar said at the company’s shareholders meeting on June 9. “All in all, we’re back in a positive momentum. This backdrop will allow us to keep improving our performance. We will resume a dynamic investment policy, both for industrial investments and acquisitions.”
Saint-Gobain, Europe’s biggest supplier of building materials, said in February that it plans to raise capital expenditures by 500 million euros ($715 million) to about 2 billion euros in 2011. The Paris-based company has said it’s targeting “double-digit growth in operating income,” helped by Asia and Eastern Europe, and a continued housing recovery in Western Europe.
The shares have gained 10 percent this year.
Economists are counting on business spending to help boost gross domestic product in the euro area by 1.9 percent this year, the most since 2007, according to estimates compiled by Bloomberg. Analysts expect the region to expand even as the European Central Bank raises borrowing costs and governments finance bailouts of debt-encumbered neighbors.
ECB President Jean-Claude Trichet signaled a July interest- rate increase on June 9. Governments in the region face as much as $65 billion in additional loans to Greece to prevent the area’s first sovereign default. At the same time, the euro strengthened 7.2 percent this year against the dollar.
“Capex is going to be a driver of the cycle from here,” said London-based Bishop, the European equity strategist at RBS. “You have got the cash flow, the business confidence and access to funding. From an economic perspective, the best way for companies to use their cash is on capital spending.”
Projections by the European Commission for fixed capital formation, a measure of expenditures by businesses and households on machinery, vehicles and buildings, are too conservative, according to RBS. Capital spending in the euro region will climb 3.1 percent this year, Jacques Cailloux, chief European economist at the Edinburgh-based bank, wrote in a May 12 report.
Infineon, Europe’s second-largest chipmaker, raised its target for investments this year to 850 million euros in May, and announced a 198 million-euro investment in production capacity and research and development in Austria, creating 400 jobs. The Neubiberg, Germany-based company spent 325 million euros last year.
‘Most Attractive Solution’
“If you think about the three uses of funds, capital expenditures and organic growth, M&A, and share repurchases, I must say that as long as we can fill our capacity, organic growth is by far the most attractive solution,” Infineon Chief Financial Officer Dominik Asam said at the company’s investor day in Munich on June 7.
Infineon raised its capital expenditure plans for the current fiscal year twice since November. Its stock has rallied 7.2 percent in 2011.
While companies are boosting spending, governments in the region are cutting back. Countries from Spain to the U.K. have begun austerity plans to avert credit downgrades after mounting debt pushed Greece, Ireland and Portugal to seek international bailouts.
European estimates put Greece’s 2012-14 financing gap at as much as 170 billion euros, two people with direct knowledge of talks between governments and the International Monetary Fund said June 9. Chancellor Angela Merkel of Germany, the biggest aid contributor, is seeking parliamentary approval to offer new loans in another three-year package to Greece, a country that has veered toward financial meltdown even after getting a 110 billion-euro lifeline in 2010.
Concerns the economy will take a turn for the worse may overshadow the increase in corporate earnings, said Tammo Greetfeld, a strategist at UniCredit SpA in Munich.
“We are currently underweight stocks and emphasize the near-term risk,” said Greetfeld, whose 2,900 forecast for the Euro Stoxx 50 Index implies a 6.1 percent gain after the gauge dropped 9.3 percent since April 29. “We’re focusing on the near-term burden of the euro-zone debt crisis. The market will trade lower in the summer. If the tensions would escalate, then our year-end target would be at risk.”
The Stoxx 600 has dropped 7.9 percent since Feb. 17 as speculation grew that Greece will default and U.S. economic indicators from housing to payrolls missed estimates. The index slipped 2 percent to 268.13 last week, falling for the sixth straight time in the longest streak since 2008, according to data compiled by Bloomberg. The gauge rose 0.2 percent today.
Telefonica SA (TEF), Spain’s largest phone company, suspended the initial public offering of its call-center unit on June 10, citing “unfavorable market conditions” after a discount on the price failed to entice investors.
European Union companies boosted spending in the first quarter, construction rebounded from a slump and export growth accelerated, the EU’s statistics office said June 8. Corporate investment rose 2.1 percent from the previous quarter, beating the median forecast of 1.8 percent in a Bloomberg survey of economists.
Spending growth last peaked in March 2007, three months before the Stoxx 600 reached a six-year high of 400.31. The gauge is 33 percent below that level now.
“Capex is underestimated,” said Edmund Shing, an equity strategist at Barclays Plc in London, whose projection for a 22 percent increase by the Euro Stoxx 50 through the end of 2011 is the highest in Bloomberg’s survey. “Companies have deleveraged a lot, a little too much, so one of the ways to use balance sheets more effectively is to increase investment,” he said. “It has important implications for earnings.”
Benchmark indexes will climb 14 percent in 2011, propelled by a doubling in profits and the lowest valuations in two years, according to the average forecast from strategists at 15 securities firms compiled by Bloomberg.
The estimates imply the Stoxx 600 will have gained 94 percent since a global market rally began in March 2009. That would be the biggest gain for a comparable period since the index more than doubled by the start of last decade.
The average of 14 U.S. strategists polled by Bloomberg called for the Standard & Poor’s 500 to end 2011 at 1,400, 107 percent higher than its 12-year low on March 9, 2009. The rally would be the biggest since the 1950s, according to S&P.
Per-share earnings in the Stoxx 600 will climb to 24.87 euros this year from 12.72 euros at the end of 2009, according to more than 12,000 analysts estimates compiled by Bloomberg. Profit growth has pushed the benchmark’s price to 12.7 times reported earnings, the lowest since December 2008.
“We would expect capex to be a key driver of profit and the stock market to follow,” said Adrian Cattley, a London- based European equity strategist at Citigroup Inc. The Stoxx 600 may end the year at 315, a 17 percent gain from last week’s close, he said. “Current valuations are attractive. We think we’re in the mid-cycle phase so don’t expect earnings to roll over. We expect stocks to track earnings gains.”
Herbert Perus, head of equities at Raiffeisen Capital Management in Vienna, says the deployment of cash will convince investors that companies’ earnings have outpaced share prices in the past two years.
“There is a mismatch between earnings, the state of the companies and the equity market,” said Perus, who helps oversee about $36 billion. “Most executives are excited,” he said, “but investors are scared. At one point, that mismatch between the real economy and share prices will have to narrow.”
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