Based on the response to my previous articles highlighting the inevitability of several, as I see it, undervalued American stocks, I decided to push forward with the international version of the same article. Whether you agree with my picks or not, or even consider it viable to invest in companies which are class 2-4 (credit rating, lack of dividend safety, too high payout, stressed sectors), it’s valuable to consider them to know what you don’t want. At times, I do research on businesses I know I won’t invest in just to see how to identify in the future what I do not want to invest in.

So, international stocks. I follow companies from Sweden, Norway, Denmark, Finland, Germany, Benelux, France, Spain, Italy, Austria, Switzerland, England, Canada, and, of course, the USA.

I also plan to include Australia in this list, though this is still on the back-burner for “things to do”, as investing in the ASX for me is rather tricky. I, currently, exclude all of Asia, Russia as well as other geographies due to how I can/cannot invest in them easily or due to the opaqueness of their financials. This doesn’t mean they’re bad investments – I just don’t follow them at this time. I do, eventually, want to include Australia, however, as this is quite an excellent investment geography.

You will notice that most of the companies mentioned come from the nations mentioned above – and, these are, after all, only 10 companies in total with 5 mentioned in this article. I’ve also excluded companies I consider to be too risky even for class 4 stocks – most prominent among them, the automotive stocks.

Let me know in comments what companies you should be included or I should watch, and I can let you know whether I have them on my list.

Let’s get going.

Enagas | Crunchbase

10. Enagas (OTCPK:ENGGF) (OTCPK:ENGGY) – 30%

Enagas, or Empresa Nacional del Gas, operates Spain’s gas grid, as well as owning multiple regasification terminals. It, simply put, transports gas. Aside from Spain, it has operations in Mexico, Peru, Chile, the USA, Greece, and Sweden and is a part of the Trans-Adriatic Pipeline project. It’s formerly a state company founded in 1972, but the grid was privatized in 1994 and Enagas emerged in 2002.

While I haven’t written a detailed article on the company yet, leaving you to do your own research here, the company fills a few boxes for me as it provides a basic necessity to an entire nation. It hasn’t cut the dividend, currently yields 7.5%, and despite coronavirus, it operates at a profit and has grown shareholder book value impressively for over 10 years.

As a result of coronavirus, Enagas valuation metrics have declined across the board – cash flow, earnings, book value – all of it currently points to lower expected earnings despite analyst estimates forecasting slight earnings growth for the full year, and quarterly results echoing this expectation.

A word on quality and metrics. Enagas is a class 3 stock – it’s BBB+ rated, has what I consider a borderline dividend safety due to an 86% LTM payout ratio, and has grown the dividend at around 4.3% over the past 5 years. Its streak is around 8 years at this time, and the EPS yield at this time is 8.7% – well above requirements. The appeal of Enagas as I see it is in the very basic nature of the industry/service it provides consumers. Aside from its international operations, it basically owns large portions of a nation’s gas grid – this is what I look for, echoing companies across defensive sectors such as Fortum (OTCPK:FOJCF) and others.

The fact is that Enagas is one of the better Class 3 utility/gas stocks that I follow and, at current undervaluation, has a better entry than any stock on my list in that sector. Enagas is a “BUY”, though it necessitates a long-term perspective.

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9. Saint-Gobain (OTCPK:CODGF) (OTCPK:CODYY) – 36%

Saint Gobain is an amazing company, and I’ve held it for years. It’s by far my largest French holding, even ahead of Renault (OTC:RNSDF). I’ve written articles on the company, which you can find here and I recommend looking them up.

At current valuation, Saint-Gobain gives us a yield of over 5.5%, well above historical norms, and trades at a TTM P/E of under 10. For a company that’s older than the United States of America and now stands as one of the most prominent building supply companies in the world with operations spanning nearly every continent, the accuracy of such a valuation is debatable.

It reflects expectations for company EPS to suffer a coronavirus-related 25% drop. The company has also not cut its dividend, and despite the drop expected in 2020, the dividend is well-covered even with the expected EPS of €1.91/share. My current target for this company lies at around €34/share, putting the target between a conservative fair value for 2021 and 2020. Even from such conservative metrics, we’re looking at an undervaluation of at least 35%.

Saint-Gobain is BBB rated, hasn’t cut its dividend in 12 years, not even the financial crisis, and has an LTM payout ratio of 53%. Dividend growth is good, but not great at 4-5% on a 5-year basis, and earnings yield is an attractive 10.5% here. Saint-Gobain is, simply put, an extremely conservative buildings material company that’s performed well even in coronavirus times and refuses to bow to the pressure of cutting dividends we’ve seen in Europe over the past few months, as simply put, the company’s earnings and finances don’t necessitate such a cut.

The company is a “BUY”.

Publicis Groupe | LinkedIn

8. Publicis Groupé (OTCQX:PUBGY) (OTCQX:PGPEF) – 41%

The company is the world’s third-largest, and the oldest marketing and communications companies in the world. It wasn’t until after WW2 that the company expanded, and it’s partially responsible for the promoting the entire nation’s economic boom due to close ties with the French government. I’ve mentioned advertising companies in my articles such as Omnicom (OMC), and the fact is that Publicis Groupe is one of the “Big four”, virtually “owning” a majority of the global advertising agency market.

The company, in fact, has even been close to merging with Omnicom back in 2014 to form the Publicis Omnicom Group – but, at that time, the deal fell through.

Current valuations for Publicis show us a P/E of around 10X based on a current NTM basis, which is exceedingly low for this company, typically trading closer to 11-16X. Revenue has soared over the past 10 years, and shareholder book value has been grown impressively as well. The company did cut its lauded dividend to €1.15/share, meaning it currently “only” yields 4.5%. Unlike Omnicom, analysts do expect Publicis to take a 25-30% EPS hit for fiscal 2020, only to then rebound 40% in terms of GAAP EPS in 2021 (Source: S&P Global), which would put the company at around 7.1X in terms of 2021 EPS. My price target corresponds closer to a 10X valuation not for 2020, but for 2021, as I don’t see 2020 accurately representing the company’s earnings potential long term.

Publicis Groupé is BBB rated, and the dividend was cut, making it a class 4 stock. However, beyond the cut, things are looking excellent. The company’s LTM P/O for the current dividend is no more than 32%, and the current price gives an earnings yield of over 14%. Based on the current estimations for 2021, the company trades at a forward PEG of 0.72, which is ridiculous for a company of this caliber.

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Do your research – I consider the company a definite “BUY” at these prices.

Logo Kesko - Kesko Sverige

7. Kesko (OTCPK:KKOYF) (OTCPK:KKOYY) – 42%

Moving from France to Finland, we find Kesko or the K-group at what I consider to be an undervaluation of 42%. Kesko, as you can read in my articles, owns large portions of the entire nation’s grocery trade, tools trade, and car trade. It’s one of the only Consumer Staples on this list, and it, currently, offers a 4.47% yield. Even Morningstar considers the company to have a “narrow” moat in Finland, given its nearly 35% market share of the grocery trade.

Expectations are for COVID-19 impact on Kesko to be virtually zero in terms of earnings, and 2021 is expected to bring stable EPS development for the coming years. I’ve updated on the company on a fairly regular basis, so I recommend those articles if you’re interested in what Kesko does, and how it’s been doing specifically, beyond “Good”.

The company hasn’t cut the dividend, has a 72% payout ratio (which for Scandinavian grocery companies is excellent), and with a 16X P/E valuation trades on the definite lower end of the spectrum for European consumer staples – typically found closer to 20-30X earnings valuation. The drawback is that Scandinavian companies, including Kesko, don’t view S&P credit ratings as necessary. You won’t find any company here, beyond truly international/large ones, paying Standard & Poor’s to rate them, so we must depend on other metrics for this. The company doesn’t really have debt issues at a net debt/EBITDA of under 1X.

I view Kesko’s value as closer to 20-22X 2019 EPS given its near-dominant market share of the entire Finnish market. Kesko is a company that will continue to grow and earn, and for that, I ascribe it a premium valuation more in line with historical norms. While we have already recovered somewhat, I still view the company as ~42% undervalued and, therefore, “BUY”.

Redovisningsansvarig till HeidelbergCement | Human Capital Group ...

6. HeidelbergCement (OTCPK:HLBZF) (OTCPK:HDELY) – 62.33%

A 62% undervaluation, for the time being, comes with a grotesque dividend cut, which, based on company financials, had a doubtful necessity – that’s how I view HeidelbergCement. I’ve written articles on the company’s operations before – for a comprehensive overview, I recommend these combined with your own research on the matter. Suffice to say, the company is the largest worldwide producer of aggregates and second-largest cement producers on the planet.

Despite an industry that’s among the most affected by increased regulatory scrutiny, HeidelbergCement has done excellent for itself, grown revenue and book value in a truly impressive manner over the past 10 years.

Yes, 2020E EPS is expected to take a 35% hit from COVID-19 – but this is expected to bounce back 51.3% in 2021, once again putting the company’s 2018/2019 dividends at a theoretical payout ratio of ~35%. Even the company’s proposed dividend, at around 70% of 2020E EPS wouldn’t have been back-breaking, but the company nonetheless elected to slash it by more than 50%, giving us a current yield of 1.44%. The reasons, beyond payout ratio, were likely credit-rating related. HeidelbergCement teeters on an investment-grade credit rating at a BBB-, which combined with the cut dividend makes it harder to consider the 13.66% EPS yield and 7X dividend appealing next to other companies.

Still, beneath the surface slumbers undeniable quality and prospects once COVID-19 is over. At the previous dividend rate, HeidelbergCement yields nearly 5.7% at current levels, and anyone believing the company’s troubles here will be long-term needs to only look at the company customer list and market share. HeidelbergCement is certainly not going anywhere – in fact, in terms of production, it’s the cleanest cement producer of its scale on the planet, and once this is over, I see the company returning to former glories not only in dividends but also in valuation as well.

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Despite the drop, I view a fair conservative valuation for HeidelbergCement to be around at least 12.5X earnings – and not COVID-19-earnings, but 2021 earnings when things go back to normal. This puts the prospective share price at €68/share, which represents the 62.33% upside I’m advertising here.

HeidelbergCement is most certainly a “BUY” here.

Wrapping up

These are the “last” 5 spots in my international lists. You may have expected more Scandinavian companies, but the fact is that Scandinavian quality companies have already mostly recovered from their lows. The exception is banks, and there are reasons why I’m holding off on them for now. We’ll go deeper into finance in part 2 of this series when I look at the most undervalued stocks internationally. However, the finance companies you’ll find there will be far larger than my typical Scandinavian picks as I believe these are actually better buys at this time.

The markets are currently overvalued when we consider 2020 earnings. There’s no doubting this – even international markets. My investments, at this time, are focused on companies which during the next year will rebound – so while valuations for this year are skewed, and from this perspective, we should see further drops, my stance is that the recovery in key sectors will be far faster than some people seem to expect.

In fact, many sectors, especially here in Scandinavia, have never even experienced any sort of closure or drop, but surges in sales. Forward expectations are certainly chaotic, and anything can happen as we move into 2Q20, 3Q20, and start approaching 2021. There will be sectors that experience significant long-term pressure, but fortunately, my exposure to things like airlines is zero, travel is less than 0.1%, automotive industrial is around 4.8%, and Energy/oil is less than 4%. Going forward, this crisis has shown me, as I believe, to focus even more on fundamental, conservative investments.

While no sector is immune to headwinds, we can construct a portfolio that experiences less volatility – and that’s part of my goal going forward. I believe all of the companies presented herein represent excellent opportunities in defensive sectors, either 2020, or as early as 2021.

I hope the list and the companies have provided some ideas or at the very least something interesting to read.

Keep in mind that for international/non-domestic investments, you always need to be even more careful with regards to FX, dividend taxation/withholding tax, and other issues that may arise. Always consult with a professional prior to investing anything, but especially before investing in international stocks. However, when done right, it can yield some truly amazing returns in unquestionably qualitative companies.

Thank you for reading.

Disclosure: I am/we are long CODGF, CODYY, HDELY, HLBZF, KKOYF, KKOYY, PGPEF, PUBGY, FOJCF, FOJCY, OMC, RNLSY, RNSDF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment.

I own the European/Scandinavian tickers (not the ADRs) of all European/Scandinavian companies listed in my articles.