At the gates of a recession that already seems inevitable and after to fight inflation it has devastated the profits in the stock markets, it is easy to get carried away by what is in stock market jargon. That is, take advantage of falls to buy securities that trade at low multiples. But in times of uncertainty like the current one, the key is not so much to invest in cheap securities but to identify those where little is paid for high margins.
One way to detect these firms is to compare the EBIT margin (the ratio of a company’s net operating income to its sales) against its PER ratio (the number of times the profit is included in the share price). This spread is one of the most well-known indicators for buying returns at attractive multiples. Therefore, when making a portfolio, the quality of the business and the price we pay for it are two variables to take into account.
With this conviction, we are proposing the creation of a portfolio made up of ten titles on the Spanish stock market that meet this criteria and that will be reviewed periodically to audit whether it is capable of beating the market. For this, a minimum of seven analysts following the value has been required. Thanks to their defensive bias, with a demand that does not vary excessively when the economy shakes, utilities and renewables lead the ranking with the best EBIT margins for this year and next year, or with percentages of 50% or higher. The portfolio is completed by pharmaceutical companies and , , and cyclical companies such as , , and .
Solaria
It has doubled its EBIT margin in the last four years and, if forecasts are fulfilled, it will reach 72% at the end of this year. The market view of the company has improved as the company has given more visibility. “We believe that it will carry out the projection of installed capacity and that gives it a unique position in the Iberian market,” says Toni Cárdenas, manager of variable income at Caja Ingenieros.
Thus, the expected growth for Solaria combines with an estimated PER for 2022 of 33.3 times. This ratio has normalized in the last year and a half from the valuation of 60.7 times that it reached in January 2021, coinciding with its all-time highs on the stock market at 30.94 euros per share. Today it is trading around 20.8 euros after rising 20% in the year.
Pharma Sea
It will take over from Solaria with the highest EBIT margin in 2023, with 89% from the 57% expected for this year. The company has put all its efforts into the field of oncology and, specifically, its antitumor drug Zepzelca, although the delay in final authorization of the drug in the US until 2025 has detracted from the optimism of analysts, who advise holding positions.
The firm, which dodges annual losses with a 4% balance, and has historically been bought at high multiples, is trading at an 18x multiplier by 2022. This is a 47% discount to its average of the last five years.
Enagas
With its price linked to the Spanish bond, while the debt remains stressed in a context of high inflation. Nor has it helped that the Fitch agency lowered its credit rating last week after questioning the payments committed by Enagás and the growth opportunities after the interruption of the Tallgrass dividend flow.
All in all, the utility can be a good shield against the volatility to come. With an estimated EBIT margin above 50% for this year and the next, the gas distributor is bought at a PER of 13 times and is one of the pure values of the Spanish stock market.
Redeia
The case of Redeia (Red Eléctrica) is the same as that of Enagás, which tends to behave better in times of economic turbulence because a large part of its income is regulated and, therefore, predictable and recurring. The company, which yields close to 7% in the year, will also obtain margins close to 50% and a profit multiplier of around 15 times.
Rovi
With an estimated PER of 14 times for 2022, it offers the largest discount against the Spanish pharmaceutical sector –40.5%– while achieving an EBIT margin of 29% this year and the next. With its titles yielding 37% since January, analysts have improved their vision of the value and it has the third best recommendation on the Ibex. In fact, the percentage of analysts who recommend opening positions in the stock were not so high since November of last year. “We maintain a positive view while waiting for catalysts to materialize in the short/medium term with the phase advancement of Letrozol ISM, the signing of new manufacturing contracts for third parties and the possibility of M&A, given its solid financial position”, they point out. from Banco Sabadell.
Mediaset
Despite the very harsh conditions for the audiovisual sector, the owner of Telecinco and Cuatro will maintain EBIT margins of 25% this year and the next, in line with those of 2021. According to the latest results presented for the second quarter of the year, the fall in operating costs has allowed the ebit and ebitda margin to advance strongly compared to the same period of the previous year. On the other hand, with its stock losing 30% for the year, it trades at one of the lowest multipliers in the selection at 4.8x.
Logistician
The distribution firm will reach margins of 24% this year and 22% for the next. According to its latest accounts, the adjusted EBIT margin improved by 0.4 percentage point to 25.1%, “despite the increase in fuel prices, demonstrating the power of the company to pass through prices”, they affirm from Renta 4. Thus, their titles are bought today at a ratio of twelve times the expected benefit for this year and 11 times for the next and they receive a buy sign.
ArcelorMittal
Recession fears have led ArcelorMittal to lose 22% of its stock market value since January. A fall that has left it trading with the lowest PER on the Ibex. The company itself has warned that restrictions on energy supply are a clear but uncertain risk for economic activity. And despite this, the long-term fundamentals for steel are positive. Its results in the first half of the year met expectations and the consensus estimates that its EBIT margin will remain around 17% for this year. This growth will be slowed down, yes, in 2023.
Atresmedia
Like Mediaset, Atresmedia has been impacted in recent months by the lower advertising investment on television in the first six months of the year and, despite this, the forecast made by the experts collected by FactSet is that it will keep its margin at bay ebit around 16%. After falling 17% on the floor for the year as a whole, its share is bought at a PER of 5 times.
Acerinox
Acerinox’s ills are common to the sector. The industry continues to suffer the consequences of energy prices and far from suffering cuts in estimates, the consensus expects an EBITDA of 1,360 million euros never before reached by the end of this year. Likewise, and despite the increase in energy costs, the group’s EBIT margin is expected to reach 13%. On the other hand, the 26% drop in the stock market has left its titles trading at a PER of three times for 2022 and six times for 2023.