Investment News Briefs Wednesday, September 9, 2009

President Nicolas Sarkozy is pushing through a whirlwind of reforms that should free up business activity significantly. Furthermore, the French economy doesn’t face nearly as many risks from the credit crisis as the US or Britain.

Martin says France’s benchmark CAC-40 index is a bargain right now. For individual companies, try AXA insurance (ADR:AXA) and French Telecom SA (ADR:FTE). Both have low price-to-earning ratios and high yields. Better still, they aren’t priced in dollars…

French investments might have seemed like a bad idea for the first nine months of French President Nicolas Sarkozy’s term. After his election in May 2007, Sarkozy looked like a huge disappointment – unless you REALLY enjoy tabloid stories. He divorced his wife, married the spectacularly beautiful ex-model Carla Bruni, and went on an enviable honeymoon in Egypt – but appeared to do nothing useful about France’s economic problems.

But now there’s some good news for French investments. Like all good Frenchmen, Sarkozy may have preferred first to concentrate on his private life when elected President de la Republique. But with his private life now settled he’s been able to spare some time for France’s economic problems. And the results for France’s future economic performance and French investments are quite positive.

First, Sarkozy got rid of the 35-hour week. This economy-destroying measure, by which companies were forced to institute a maximum 35-hour workweek, was brought in by the Socialists in 2000, and has embedded itself throughout the French economy, increasing labor costs, reducing productivity and harming French investments. Removing it will not make much difference for big business – as one union leader said “nobody wants to renegotiate the 35 hours and reopen Pandora’s box” but it will make a huge difference for medium-sized and smaller businesses, which will be able to match their workforce with the demands of their business, without being forced into a straitjacket by the state.

Sarkozy has also passed reforms freeing up France’s retail sector to increased competition with longer operating hours, tighter regulation of unemployment benefits, and freedom for firms to negotiate directly with employees rather than deal with a union.

In addition to these economic reforms, Sarkozy has pushed through constitutional reforms, limiting the president to two five-year terms and giving the legislature more power to introduce legislation.

The remarkable feature of Sarkozy’s burst of reformism is that the French unions have been unable to tie up the streets of Paris with major demonstrations, as they had done to stall several previous bursts of reformism in the last decade. A Day of Action protest in June had only half the expected turnout and a nationwide strike had only 4% support.

Sarkozy’s tactic has been to move forward with reforms on several fronts at once; this seems to have worked, and Sarkozy’s opinion poll numbers have recovered from lows hit in early spring.

The benefits of these reforms will be seen most clearly in France’s next period of economic expansion, which may not be immediate because of the general global slowdown. France’s gross domestic product (GDP) is expected to increase only 1.7% in 2008, according to the Economist, the same as the average for the 15-nation Eurozone as a whole.

On the bright side, inflation is expected to be only 3.2%, below the Eurozone average and well below U.S. inflation rates. The balance of payments deficit is only 1.6% of GDP, well below both the United States and Britain, in spite of the current high valuation of the euro. Euro short-term interest rates are currently 4.25%, above France’s inflation level, and French long-term government bonds yield 4.8%, well above inflation, so there is little danger of an inflationary spiral.

French Investments to Fatten Your Portfolio

A further advantage of the French stock market is that it is currently cheap, trading at only 11.5 times earnings. The CAC-40 index is down about 25% this year, similar to the performance of the Dow Jones Industrial Average Index, but it had risen nowhere near as far between 2003 and 2007, and is still 30% below its 2000 high. With France’s economic and political prospects looking brighter than they have in a long time, French investments could be an attractive part of your portfolio.

First, you can buy the index. The iShares MSCI France Index (EWQ) is an exchange-traded fund (ETF) with a value of $266 million, sufficient for liquidity, that is currently trading at the French market’s Price/Earnings (P/E) ratio of 11.4, well below the S&P500 Index P/E ratio of 14.6. Because France is unlikely to suffer a deep recession and isn’t playing host to enormous write-offs in its financial sector, it is reasonable to expect that the index would trade at a premium to the S&P 500, so that’s already a bargain.

Attractively, EWQ also carries a 4.9% yield, denominated in euros, giving income investors an attractive diversification from the U.S. market, which even after its recent drop yields only 1.7% on the S&P 500.

Second, you might consider France Telecom SA (ADR: FTE) which operates both fixed and mobile telephone systems in France, Britain, Spain and Poland – almost all of its operations in Europe, therefore, without significant exports to the dollar zone. France Telecom is very reasonably priced at 8 times trailing earnings. Even more attractive, it has a dividend yield of 6.2%, again denominated in euros – it thus represents an ideal investment for income-oriented investors.

Investors wanting a stock with recovery potential might consider AXA (ADR: AXA), a huge insurance company and asset manager based in France but with substantial operations worldwide. Because of the battering taken by financial services companies, AXA currently trades at only 6.5 times earnings, with a 7% yield. The one caveat is that insurance companies are given a lot of flexibility when “marking to market” their investments; it’s therefore possible that AXA has a large exposure to the U.S. subprime market or some other disaster that it hasn’t owned up to. However, the stock’s low rating and high dividend certainly compensate you well for this risk.

Finally, there’s a somewhat higher rating at 13 times earnings (but alas, with no dividend) for France’s largest geophysical company CGG Veritas (ADR: CGV). CGV provides geophysical services to the oil and gas industry worldwide, and manufactures land, marine, and subsea data acquisition equipment. Needless to say, business at CGV is booming, so the forward P/E ratio is only 9.38.

As I said, French investments seem well worthwhile for a substantial chunk of your money.

Source: Why French Investments are Worth Another Look

• Continental Airlines Inc. (CAL) became the latest airline to announce reduced flight service and jobs cuts yesterday (Thursday). Continental will eliminate 3,000 jobs and 16% of its flight capacity, The New York Times reported. The cost cutting efforts follow similar moves from UAL Corp.’s (UAUA) United Airlines, Northwest Airlines Corp. (NWA) and Delta Air Lines Inc. (DAL).

• France Telecom SA (ADR: FTE) announced yesterday (Thursday) that it was pursuing a $42 billion bid for Sweden’s TeliaSonera AB (PINK: TLSNF), The Associated Press reported. TeliaSonera dismissed the initial offer as too low, but France Telecom reported it has the backing of the French government and could up its bid.

• The Mortgage Bankers Association (MBA) announced yesterday (Thursday) that both the percentage of loans in foreclosures, as well as the number of foreclosure starts, climbed to levels not seen since 1979, MarketWatch reported. For one- to four-unit properties, 2.47% of all mortgages outstanding were in foreclosure, up from 2.04% in the fourth quarter, according to the MBA’s latest National Delinquency Survey. At the end of first quarter 2007, only 1.28% of such homes were in foreclosure.

• The number of U.S. citizens filing first time unemployment claims fell last week, the Department of Labor said yesterday (Thursday). Initial jobless claims decreased by 18,000 to 357,000 in the week that ended May 31, the lowest level in more than a month, due in part to the Memorial Day holiday, Bloomberg News reported.

• Stocks in China fell to a six-week low Thursday (yesterday) on speculation that the government would tighten prices to curb inflation. The move that would shave profits from the country’s commodity titans. The CSI 300 Index, which tracks 300 stocks traded in Shanghai and Shenzhen, fell 1 percent to close at 3,512.14, the lowest since April 23, Bloomberg reported.

• The U.S. government announced yesterday (Thursday), via the Department of Justice, that it is suing Honeywell International Inc. (HON) for selling material used in bulletproof vests that it alleges was defective, The Associated Press reported. According to the DOJ, Honeywell had scientific data that showed the ballistic material, known as Zylon, “degraded quickly over time, especially in hot and humid conditions,” leaving the vests unfit for use. The department also alleges that Honeywell failed to notify the government or the vest manufacturer, Armor Holdings Inc., of the defect.

• E.I. Du Pont De Nemours & Co. (DD), commonly known as DuPont, said yesterday (Thursday) that it is targeting a 40% increase in soybean and corn yields over the next 10 years through its Pioneer Hi-Bred unit, according to Thomson Financial. The company expects DuPont Agriculture & Nutrition segment sales to grow by 6% to 8% and earnings by more than 15% on average between 2007 and 2010.

• Swiss pharmaceutical maker Novartis AG (ADR: NVS) spent nearly $1.3 million lobbying the U.S. government in the first quarter on drug and health care issues, according to a recent disclosure form, The Associated Press reported. Novartis lobbied on bills designed to ensure the government has a sufficient stockpile of influenza vaccine in case of an outbreak.

Source: Global Investing Roundups: Friday, June 6th, 2008

Verizon Wireless is 55% owned by Verizon Communications Inc. (VZ) and 45% owned by Britian’s Vodaphone Group PLC (ADR:VOD).

The deal values Alltel – the fifth-largest wireless carrier in the United States – at more than eight times its earnings before interest, tax, depreciation and amortization (EBITDA). Or about $22 billion, which includes Alltel’s debts.

In November, Alltel’s $27.5 billion sale to private equity firms TPG Capital and GS Capital Partners LP, an arm of Goldman Sachs Group, Inc. (GS) was nine times EBITDA.

Alltel has 13 million customers and spans rural markets and smaller cities in 34 states, comprising a 5% share of the market. It also handles calls for Verizon and AT&T in areas where they don’t have coverage.

The purchase will allow Verizon to offer service in 57 rural markets. Synergies are expected to generate incremental savings of $1 billion in the second year after the deal closes, Verizon Wireless said a statement.

“This move will create an enhanced platform of network coverage, spectrum and customer care to better serve the growing needs of both Alltel and Verizon Wireless customers for reliable basic and advanced broadband wireless services,” Lowell McAdam, Verizon Wireless president and chief executive officer, said in the statement.

An Alltel acquisition would not only shoot Verizon Wireless past AT&T as the top U.S. wireless service provider, but it will also put additional downward pressure on the T-Mobile USA Inc. and troubled Sprint Nextel Corp. (S).

Telecom Titans Getting Bigger Around the World

The high profile merger of telecom titans has quickly developed into a strong global trend.

In Europe, France Telecom SA’s (FTE) $41.9 billion offer for Finnish fixed-line provider TeliaSonera AB (PINK:TLSNF) was rejected Thursday. But that doesn’t mean the deal is over.

“The question is how much can they raise the offer,” Thomas Romig, a fund manager at Cominvest Asset Management in Frankfurt, told Bloomberg Television.

Earlier this week, Telkom South Africa Ltd. (ADR:TKG) said it received a takeover offer from Mvelaphanda Resources Ltd. and Vodaphone.

And in China, the telecom market is undergoing a massive government-ordered restructuring – with the top six companies being melded into three – as the country ramps up efforts to adopt third-generation wireless technology.

Domestically, the industry trends only makes expansion more difficult for large – but not large enough – wireless providers such United States Cellular Corp. (USM), Rural Cellular Corp. (RCCC) and Shenandoah Telecommunications Co. (SHEN) to compete.

Unfortunately, that’s their problem to deal with because the mobile industry is expanding by leaps and bounds as customers increasingly ditch fixed-line service to wireless.

And the leaders of wireless service and technology are the ones that will thrive.

Source: Verizon to Buy Alltel for $28 Billion, Vaults Past AT&T as No. 1 U.S. Mobile Provider