Marta Pérez | For 2018, analysts’ consensus is fundamentally betting on cyclical stocks, based on a scenario of markets’ revaluation both in the Europe and in the US. So amongst those linked to raw materials, Acerinox and Repsol stand out; amongst the big building companies, Ferrovial; and in the banking sector, Santander and CaixaBank. Enagás, Iberdrola and Telefónica would be the leading defensive stocks, although it’s likely they could lag behind bonds in terms of the returns they will offer against a backdrop of greater growth, inflation and interest rates.
Of course it has not been, nor will be, a bed of roses for these stocks, but they will be the preferred ones this year for the following reasons:
Acerinox, although it went through a bad batch in Q3, is now recovering and so 2017 will be its best year of the last decade. Despite the high volatility of nickel prices over the last few months, demand will remain robust in 2018 when the prices of raw materials stabilise. Furthermore, the impact of the tax cuts in the US should be an additional catalyst. (Target price of 14,60 euros/share according to Consenso del Mercado).
Repsol’s Q3’17 results were better-than-expected thanks to the 27.7% reduction in debt compared with H1’16. According to Bankinter, “this substantial improvement is due to the divestments outlined in the strategic plan; to the generation of operational cash, which includes a reduction in commercial working capital, which far exceeds net investments and financial interest payments.” The first consequence of this reduction in debt has been the upgrade in Repsol’s rating by S&P from BBB- with a negative outlook to BBB with a stable outlook. (Target price 15,77 eur/share).
Enagás will see how its smaller base of regulated assets (which includes assets in construction or under development) will be offset by its diversification, with its main international investments in Chile, Peru and Mexico. ACF analysts hope the company will continue to meet the objectives in its strategic plan, “which includes increasing internationalisation, operating efficiency and the development of projects like the European gas pipeline Trans Adriatic Pipeline (TAP).” Added to that is the positive trend in gas demand, the stable interest rate environment and the high shareholder return: Enagás’ aim is to raise its dividend by 5% yearly until 2020, a target which it has been meeting over the last few years (target price of 26,26 euros/share).
Apart from its attractive dividend yield (4.8%), Telefonica is the Ibex-35 company which has the most potential for revaluation (21%), according to Bloomberg. Its Q3’17 results were worse-than-expected, revenues continue to drop in Europe (-1.7% in Spain; -3.0% in Germany and -6.4% in the UK) and the rate of growth in Latin America has slowed. But the key remains the company’s continued reduction in net financial debt (3.7 billion euros less in September 2017 compared with a year earlier). As SelfBank says: “it has a very interesting technological profile and is learning to adapt very well to changes in the market where its networks will play a very important role.” (Target price 11,35 euros/share).
Iberdrola is one of the less volatile stocks in the blue-chip Ibex35 index. We would highlight its geographical diversification, having a very important presence in Spain, the UK, the US and Latin America, where it’s the leading electricity company. Apart from its sizeable experience in renewable energy projects, it has a revaluation potential of 9%, according to Bloomberg’s analysts consensus. Its dividend yield is also quite attractive (4.8%). In addition, it has increased its interim dividend charged against 2017 results by 3.7% (0,14 euros/share). (Target price 6,97 euros/share).
In the case of Santander, the key is its geographical diversification, with Brazil as the main source of results. There is interesting growth potential there given that country’s low bancarisation and a stable macro environment, with some acceleration in credit expected from 2018. The bank’s message about its business in Spain is also optimistic. Its aim is to obtain its synergies target for Popular ahead of time, previously forecast for 2020. Apart from the trend in TIRs, the key will be lending growth. As Sabadell says: “the risks from property exposure have decreased after the sale of the impaired assets to Blackstone. And the risks from litigation are more limited after the actions taken to partially compensate some of Popular’s investors.” (Target price 6,54 euros/share).
Ferrovial is very well positioned in the infrastructures sector, where it is hoped it will be active both in the US as well as in Europe, as the central banks withdraw their expansionary monetary policies and replace them with more aggressive fiscal policies. In fact Link Securities point out that “Donald Trump is expected to reveal some time this month his infrastructures plan, with which he aims to renew and modernise many of them in the country.”
Whatsmore, the quality of the firm’s key assets, namely Canada’s 407ETR motorway and Heathrow airport, is very good in terms of cash generation and the construction margin is beginning to show signs of recovery (Target price 20,70 euros/share).
CaixaBank was the best performing domestic banking stock in 2017 and shows no signs of a slowdown in the short-term. Deutsche Bank flags its “high credit quality, good dividend yield and a good strategy for capturing clients which has allowed it to grow in the consumer and corporate credit segments.” (Target price 4,26 euros/share).
There are three other stocks which don’t have such a big presence in portfolios, but which also should be ones to watch: IAG (target price 7.55 euros/share), which survived the consolidation process that put an end to AirBerlin, Monarch and Alitalia. It will benefit from a rise in passenger and goods traffic if the economy continues to grow at the current rate; Mediaset (target price 7,91 euros/share), which is one of the most efficient TV companies in the EU. The outlook for its advertising revenues in the short-medium term is also very good. And BBVA (target price 8,66 euros/share), which should benefit especially from the overall improvement in macro data and, above all, from its good positioning in digital banking.