Thursday, 21 August 2014

Europe - falling margins and lacklustre PMIs...Mr Draghi should be watching and taking notes

I noticed that the Dutch listed food retailer Ahold was getting back towards the 'interesting' Euro12.5 levels I set three months ago (link here).

Ahold shares - and more pertinently their Q2 results released today - indicate something deeper about pretty much all developed market countries out there at the moment: it is not easy.  Falling identical sales growth, generally falling margins and pacing through the presentation document a realisation that businesses cannot stand still, there is a constant need for innovation, cost cutting and general change.

For Ahold some of this is priced in and sub Euro12.5 it would be trading on a single digit EV/ebit multiple, lowly geared balance sheet and 3.7% dividend yield i.e. a medium-term value investor can start to make that work (although I do note some talk about potential acquisitions in the US to help boost their market position there - not so sure about that).  

This 'it is tough out there' feel however remains very pertinent...and this is shown by the most recent composite Markit PMI disclosures in Europe which do not strike me as compellingly strong despite a higher than the neutral 50 level outcome: 

I particularly liked the insight that 'selling prices have fallen in each month since April 2012, with the latest cut the sharpest in three months'.  That really says something even before you get onto the continuing French-German economic performance divergence...

To me Markit's conclusion is actually potentially dangerous smacking of Draghi's 'Mr Confidence' perspective of a couple of weeks ago (link here): 

' is most likely that policymakers will allow recent stimulus efforts to have a greater chance to filter through to the real economy before making any further moves'

Action still needs to be sooner rather than later.  The signal from the core Euro Area bond markets is telling you this...and the falling margins from companies like Ahold.

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