DAX Divides Analysts From Investors as Valuations Tumble 54%

Never before have investors disagreed more with equity analysts about the outlook for profits in Germany.

Companies in the DAX Index (DAX) will earn 723.43 euros a share next year, up 11 percent from 2011, according to securities industry estimates compiled by Bloomberg. The benchmark gauge for German common equity is trading for 7.2 times forecasts, the lowest multiple on record. Should the ratio revert to its five- year average of 15.6 and stock prices stay the same, profits would fall to 331 euros next year, the data show.

Concern about the cost of keeping other European governments from defaulting has cut the DAX’s gain since the bull market began to 41 percent from as much as 104 percent in May, data compiled by Bloomberg show. The index has declined to its lowest level since July 2009 after gross domestic product slowed and the party of Chancellor Angela Merkel, who has led efforts to preserve the common currency, lost five straight regional elections.

“Germany is the economy of last resort in Europe and as such would be bearing a significant bill from the bailout,” said James Buckley, who helps oversee $52 billion at Baring Asset Management in London. “If you are downgrading GDP expectations globally, one of the first markets you are going to sell is Germany. If analysts haven’t started publishing their downgrades, then they are in the pipeline.”

The DAX lost 2.3 percent to 5,072.33 today, dropping to the lowest level since July 2009.

Economic Hazards

Germany is the chief underwriter of emergency loans offered to Greece, Ireland and Portugal because it is the region’s biggest economy, contributing about 27 percent of GDP. European Union governments agreed to lend 440 billion euros ($599 billion) to the most-indebted countries. The program is in addition to the almost $1 trillion fund approved last year.

The DAX dropped 6.3 percent to 5,189.93 last week as European Central Bank President Jean-Claude Trichet said threats to the euro region’s economy have intensified and three German officials said Merkel’s government is preparing plans to protect banks in case Greece defaults. The index has fallen 31 percent since reaching its 2011 high of 7,527.64 on May 2, pushing its valuation to 9.2 times reported profit from 15.8.

At 7.2 times forecast earnings for 2012, the DAX is trading at a discount to benchmark indexes in Spain, France, Portugal and Ireland, and 14 percent below the average valuation of the Stoxx Europe 600, according to data compiled by Bloomberg. Deutsche Bank AG (DBK), the country’s biggest lender, is priced at 3.7 times 2012 estimates, compared with 5.3 for Banco Santander SA in Madrid and 4.3 for UniCredit SpA in Milan.

Peak Profits

Forecasts for DAX earnings growth in 2012 peaked on July 13 after rising 17 percent since the start of the year. They have since declined by 5.1 percent, according to data compiled by Bloomberg. For Spain’s IBEX 35 and Italy’s FTSE MIB Index (FTSEMIB), projections have been reduced by 13 percent and 15 percent since peaking on May 2, the data show.

“We are expecting earnings downgrades,” Patrick Moonen, who helps oversee about $500 billion as senior strategist at ING Investment Management in The Hague, Netherlands, said in a telephone interview on Sept. 8. “I would not be surprised that next year earnings growth in the country will be close to zero.”

Analysts say Deutsche Bank’s profits will rise 9 percent next year even after Josef Ackermann, the chief executive officer, said on Sept. 5 that stock and bond markets are reminiscent of the financial crisis of late 2008. The price- earnings ratio of 3.7 times 2012 profit forecasts is lower than the stock has ever traded relative to reported income, data compiled by Bloomberg show.

‘Stronger Economies’

“Deutsche is still certainly one of the best-run banks in Europe,” Guido Hoymann, a Frankfurt-based analyst at Bankhaus Metzler, said in a telephone interview on Sept. 8. He has a “buy” rating on the stock. “It’s also still a German bank, and Germany’s one of the stronger economies in Europe. Above all, they’ve always proved to be excellent in managing risks.”

The stock gained as much as 6.5 percent on Sept. 8 after Ackermann said his Frankfurt-based firm may reach its full-year income estimate of 10 billion euros if European capital markets and the sovereign crisis improve. The stock has fallen 41 percent in 2011, cutting its rally since March 2009 to 31 percent, according to data compiled by Bloomberg.

The price of options to protect against losses in Deutsche Bank shares is rising more than other European lenders. Three- month options that pay owners should the bank drop 10 percent cost 1.3 times the price of bullish contracts, according to Bloomberg data. That’s up from 1.14 at the end of July, the biggest increase among financial firms in the Stoxx 600. Stocks subject to bans on short selling were excluded.

ThyssenKrupp Profits

ThyssenKrupp AG (TKA), Germany’s biggest steelmaker, has lost 38 percent in two months after climbing to a three-year high of 35.84 euros on June 30. Analysts expect profits to increase 62 percent in 2012, pushing its valuation down to 6.7 times forecast profit, according to data compiled by Bloomberg. The shares have traded at a median valuation of 18 times reported earnings since 2001, according to data compiled by Bloomberg.

“ThyssenKrupp should be able to weather a macroeconomic downturn fairly well,” Ingo-Martin Schachel, a Frankfurt-based Commerzbank AG analyst who has a “buy” rating, said in a Sept. 8 telephone interview. “The stock has fallen in line with other steel companies. I find that surprising given the company has a more resilient portfolio structure, the earnings were positive and the balance sheet is healthy. The decline in the stock is unjustified and the valuation is most attractive.”

Steel Demand

Steel demand slowed last quarter after a “strong” prior period, and European consumption dropped “sharply,” ThyssenKrupp said Aug. 12. The Essen, Germany-based company affirmed full-year forecasts for a 10 percent to 15 percent increase in sales and adjusted earnings.

The German economy almost stalled in the second quarter. Gross domestic product, adjusted for seasonal effects, rose 0.1 percent from the first quarter, when it expanded at a 1.3 percent rate, the government said Aug. 16. Economists had forecast growth of 0.5 percent, according to the median of 33 estimates in a Bloomberg News survey.

German investor confidence fell more than economists forecast in August to the lowest in more than 2 1/2 years, a report from the ZEW Center for European Economic Research in Mannheim showed Aug. 23. Sentiment among German business leaders slipped to the lowest level in more than a year last month, the Ifo institute in Munich said a day later.

U.S. Economy

Stocks plunged worldwide on Aug. 18 after the Federal Reserve Bank of Philadelphia’s general economic index dropped to minus 30.7 in August, the lowest since March 2009, when the economy was in a recession. The U.S. failed to create any jobs last month, the Labor Department said Sept. 2.

“As investors looked at the weakness of the peripheral nations in the first half of the year, they concentrated their firepower in the big German names,” said Frankfurt-based Neil Dwane, who helps oversee $154 billion as chief investment officer at Allianz Global Investors’ RCM unit. “When global growth was put in doubt, they looked into their portfolios and what most people had to sell was German stocks.”

Merkel said Aug. 21 that she won’t let financial markets force politicians’ hands after reiterating her opposition to the creation of common euro bonds that would overtake each nation’s debt. Her Christian Democratic Union suffered its fifth election loss this year, failing on Sept. 4 in Merkel’s home state as voters grew skeptical of her handling of the euro-area debt crisis.

Bought Bonds

While investors dumped German equities, they bought bunds. Yields on 10-year and 2-year government bonds on Sept. 9 reached records lows of 1.77 percent and 0.39 percent. At the same time, credit-default swaps to insure investments in bunds rose to the highest since March 10, 2009 on Aug. 11, Bloomberg data show.

The pattern mirrors the U.S., where 10-year Treasuries rallied after S&P lowered the country’s credit rating to AA+ from AAA. Gains in the securities pushed yields below 2 percent for the first time this month.

DAX shareholders now get 9.1 percent of their investment back in earnings, Bloomberg data show. That tops the expected returns on 10-year German government bonds by 733 basis points, the highest spread ever for German stocks and the biggest differential among the five largest developed markets.

“You can’t look at Germany in isolation,” William Fries, the Sante Fe, New Mexico-based manager of the $26-billion Thornburg International Value Fund, said in a telephone interview on Sept. 8. His fund owns shares of Volkswagen AG (VOW) and Deutsche Bank. “Germany is certainly the strongest, the biggest economy in Europe. Right now, the biggest issue it has is whether to bail out the rest of Europe that doesn’t have its financial strength.”

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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