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Overvalued, but promising stocks: Europe
18
Sep
Overvalued, but promising stocks: Europe

 

Usually in our reviews we avoid overpriced companies with high P/E ratios. We always try to pick up adequately valued or undervalued stocks so there would be no risk for the investors to find themselves in a bubble. But a high P/E ratio doesn’t always mean the price will drop soon. Many young and promising companies are a bit overvalued, but that’s because the investors are betting on their rapid growth in the future. Sometimes the company remains overvalued for years, and the share price just keeps climbing up.

So, today we have a nice list of European companies with very high P/E ratios. To make it to the list, a company must meet three additional conditions:

— A market cap of at least $2B. This means it’s quite large and stands firmly on its feet.

A solid 5 years profit growth. In other words, the company must be profitable and showing real growth, so the investors’ hopes for its expansion wouldn’t be groundless.

A positive 5-year share price change. This condition helps us to make sure that the high P/E ratio is not the result of a drop in profits and the company is not in a crisis.

If the company is publicly traded for less than 5 years, conditions 2 and 3 are evaluated based on an available track record.

It is worth noting that in Europe, unlike the US, such companies were quite few. Even though we substantially lowered the market cap threshold for Europe (for the US it was at least $10B), there were only three companies suitable for the review with P/E ratio exceeding 100. For this reason, we limited the list to only 6 companies. At the same time, the rating turned out to be very international and diverse in terms of size of the companies. It has companies from 4 countries, including both younger upstarts of 2010’s, and giants such as Ubisoft and Deutsche Telekom.

The stock charts use the currencies of the respective exchanges; all other data are shown in euro. The letter "M" stands for millions, "B" means billions.

1. Deutsche Telekom

T-Mobile office

— Symbol: DTE

— Exchange: XETRA

— Country: Germany

— Currency: EUR

— Market cap:: €74B

— Annual turnover: €73B

— P/E ratio: 133

— Dividend yield: 3.9%

— Share price change YoY: +3%

— 5-year share price change: +66%

— 5-year profit change: +37%

Description. Deutsche Telekom is a German telecommunications company, the largest in Europe and the third in the world in terms of capitalization. It was established in 1995 upon the division of Deutsche Post (est. 1947). The company currently has a free-float of 68 percent. Despite its German origin, Deutsche Telekom owns a significant share of the telecom market in several other countries and has subsidiaries throughout Europe such as Slovak Telekom, Telekom Albania, Telekom Romania, Magyar Telekom and others. The company belongs to the famous T-Mobile group that dominate the US market, and actively uses the T-Mobile brand in its advertising.

Chart. The price chart for Deutsche Telekom shares in the long term is somewhat disappointing: the peak level was reached in 2002, then for a long time the overall trend was negative and only in 2013 it became positive again. But in recent years, the growth rate has accelerated, and now the stock is trading near the old record. Dividends are paid irregularly, although the dividend yield in 2016 was not bad.

Pros. Positive share price and profit growth trend in recent years, huge market cap and turnover.

Cons. Huge P/E ratio, irregular dividend payout.

2. BooHoo.Com

The dress ad on BooHoo.Com

— Symbol: BOO

— Exchange: London Stock Exchange

— Country: United Kingdom

— Currency: GBP

— Market cap:: €3.0B

— Annual turnover: €325M

— P/E ratio: 109

— Dividend yield: –

— Share price change YoY: +225%

— 3-year share price change: +190%

— 5-year profit change: +119%

Description. Online apparel retailer. Its main markets are Europe, the US and Australia, but it also has customers in many other countries. The company is famous for its brands boohoo, boohooMAN, PrettyLittleThing, and Nasty Gal.

Chart. 2014 was unsuccessful for the company’s shares, but since 2015 they keep growing steadily. The shares hit an all-time high in 2017.

Pros. Largest one-year profit and share price growth in this review, excellent 3-years share price growth.

Cons. No dividends, large P/E ratio, relatively low turnover.

3. Yoox Net-A-Porter

Yoox Net-A-Porter website

— Symbol: YNAP

— Exchange: Borsa Italiana

— Country: Italy

— Currency: EUR

— Market cap:: €2.5B

— Annual turnover: €1.9B

— P/E ratio: 108

— Dividend yield: –

— Share price change YoY: +8%

— 5-year share price change: +157%

— 5-year profit change: +28%

Description. Another online clothing store. The company has branches in the USA, Great Britain, Japan, France, China, Spain, and Hong Kong. It focuses on the global market, operating in more than 100 countries. Photo. Yoox Net-A-Porter ad.

Chart. In early 2010’s, the company’s shares showed a magnificent growth: in 4 years they surged in price about 7 times. Since then the stock had rolled back, but then recovered again and now is relatively stable.

Pros. Excellent 5-years share price growth, some growth in profits, large turnover (it’s still comparable to the market cap, despite the huge P/E ratio).

Cons. Huge P/E ratio, no dividends.

4. Sedlmayr Grund und Immobilien

Sedlmayr Grund und Immobilien offers real estate

— Symbol: SPB

— Exchange: XETRA

— Country: Germany

— Currency: EUR

— Market cap:: €2.5B

— Annual turnover: €96M

— P/E ratio: 96

— Dividend yield: 0.9%

— Share price change YoY: +24%

— 5-year share price change: +172%

— 5-year profit change: +3%

Description. The company acquires, manages, optimizes and rents real estate. Sedlmayr Grund und Immobilien operates in Germany, mainly in Munich and Stuttgart. The сompany’s assets include residential, industrial and commercial properties.

Chart. Of all companies in the review, Sedlmayr Grund und Immobilien shows the most stable multi-year growth in stock prices. The shares have been growing for the seventh year in a row (the track record for earlier periods is not available). The company pays stable yearly dividend.

Pros. Great multi-year stock price growth.

Cons. Extremely low turnover for such a market cap, insignificant profit growth, very low dividend.

5. Ubisoft Entertainment

The Rayman Origins game

— Symbol: UBI

— Exchange: Euronext Paris

— Country: France

— Currency: EUR

— Market cap:: €6.1B

— Annual turnover: €1.5B

— P/E ratio: 68

— Dividend yield: –

— Share price change YoY: +45%

— 5-year share price change: +910%

— 5-year profit change: +24%

Description. The company produces, edits, and distributes video games and is one of the largest game developers in Europe. The company was founded in 1986 and began to develop its own games in 1994. The first and one of the most famous games from Ubisoft was the Rayman series. Assassin’s Creed, Prince of Persia, Tom Clancy’s, and others are also widely known. Ubisoft has offices in more than 20 countries including the US, Canada, Spain, China, Germany, Russia, Bulgaria, Ukraine, Romania, and Italy.

Chart. Ubisoft has been publicly traded for a relatively long time. The company’s shares reached record highs in 2000 and 2008—just during the global market bubbles. But after 2008, Ubisoft stock prices have behaved differently compared to shares of most other companies. For Ubisoft, the stock market crash of 2008 turned out to be only the beginning of a long-term decline in stock prices. The stock has bottomed only in 2011. Since 2012, the company began to recover slowly and only in 2016 its shares hit a new all-time high. But right now the stock is growing at a tremendous rate.

Pros. Fantastic tenfold increase in stock prices over five years, tangible (though not that impressive) increase in profits, relatively low P/E ratio.

Cons. No dividends.

6. Fevertree Drinks

Fevertree’s signature bottles

— Symbol: FEVR

— Exchange: London Stock Exchange

— Country: United Kingdom

— Currency: GBP

— Market cap:: €2.8B

— Annual turnover: €113M

— P/E ratio: 67

— Dividend yield: 0.5%

— Share price change YoY: +123%

— 3-year price change: +1059%

— 5-year profit change: +44%

Description. Fevertree is a producer of premium drink mixers. The company’s brands include Indian Tonic Water, Naturally Light Tonic Water, Elderflower Tonic Water, Mediterranean Tonic Water, Naturally Light Ginger Beer, Sicilian Lemonade, Spring Soda Water. Fevertree Drinks deals not only with retail stores, but also supplies drinks to restaurants, hotels, and bars.

Chart. The company’s track record is only available from 2014 onwards, but since then its shares are constantly growing, and at a huge rate: they surged in price 11 times in less than 3 years. The company pays fairly low dividend twice a year.

Pros. Largest 3-year share price growth in this review, great yearly share price growth, good profit growth, relatively low P/E ratio.

Cons. Very low dividend, extremely low turnover compared to capitalization.

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