discount dax Germany’s Bargain Blue Chips

Stock market turmoil has wiped €150 billion off the market value of Germany’s top companies this year, but many of them are well capitalized and profitable. That makes them attractive takeover candidates — with some notable exceptions.
Traders work at their desks in front of the German share price index, DAX board, at the stock exchange in Frankfurt.

For anyone banking on globalization, German companies were a safe bet for many years because they sold more than two thirds of their products abroad.

But since the start of the year, that reliance on exports has become a millstone. Markets are speculating that the Chinese boom is coming to an end, that growth will slow and the global economy is about to enter a period of trade barriers and nationalist retrenchment as espoused by populist parties around Europe and presidential candidates like Donald Trump.

As a result, investors are withdrawing capital from Germany faster than from any other highly developed industrial economy. Germany’s DAX index has lost 12 percent since the start of the year, wiping €150 billion, or $163 billion, off the value of the leading stocks it contains.

Some 30 of the 160 firms listed in the four most important share indices DAX, MDax, TecDax and SDax now cost less than the equity capital they’ve posted in their balance sheets.

Some 30 of the 160 firms listed in the four most important share indices, the DAX, MDax, TecDax and SDax, now cost less than the equity capital they’ve posted in their balance sheets, according to calculations by Handelsblatt.

That’s one in five companies, more than at any time in the last four years. In the DAX index, nine companies have fallen below their book value or net asset value, defined as assets minus depreciation, debt and intangible assets such as goodwill. In fact, several firms are trading far below their book value.

“Financial markets expect that these companies will destroy value in the future,” Christian Gattiker, chief strategist at Swiss bank Julius Bär, told Handelsblatt.

In terms of book value, VW, Deutsche Bank and utilities E.ON and RWE would appear to be the most mouth-watering takeover candidates in the DAX. But no one’s biting because they’re all unattractive for various reasons.

At first sight, automaker VW is tantalizingly cheap with a market valuation of just €59 billion, well below its €93.4 billion book value. That’s a striking and rare discount on an industrial stock that has been impressively profitable over the years.

But the scandal over rigged diesel emissions has turned off investors because they fear it will lead to billions of euros in writedowns. VW has already set aside €6.8 billion to cover looming fines and class-action lawsuits in the United States. But that’s just the beginning. The impact on automaker’s image and resulting declines in sales and profit will likely be at least as damaging.

Deutsche Bank, Germany’s biggest bank, has a stated book value of €64 billion. That’s €46.40 per share. Its share price amounts to just a third of that, €15.75. But the bank faces litigation costs and a complex restructuring to boost profits and capital — its book value has fallen almost 10 percent in the last three years.

At Germany's largest utility E.ON, the book value has been halved due to writedowns on unprofitable power plants. Its shares have fallen accordingly. Both E.ON and RWE have to shoulder the costs of dismantling their nuclear power stations as part of Germany’s phaseout of nuclear power by 2022.

But in the current stock climate, investors are even punishing companies that are highly profitable, well capitalized and don’t have to resort to writedowns. Last year, building materials group Heidelberg Cement increased its operating profit by 14 percent to €2.6 billion, and its equity has risen by 24 percent to €14.3 billion in the last three years. Nevertheless, its current market value is well below that at €12.6 billion.

Even luxury automaker BMW, whose business is booming, is trading slightly below its equity capital.

Fertilizer group K + S is trading at a 10 percent discount to its equity capital after a 30 percent slide in its share price since the start of the year. That’s despite a 22 percent rise in its equity in the last three years, meaning that investors haven’t been disappointed in that period.

K + S is one of a number of genuine takeover candidates, though. Canada’s Potash Corporation was ready to pay €41 per share for it last year, a sum that K + S Chief Executive Norbert Steiner said at the time was too low. The share price has since fallen to €19 and many investors would be happy if Potash renewed its offer. But the slide in raw materials prices has hit the war chests of predators like Potash.

Stada is another takeover candidate. The generic drugmaker has high-revenue drugs such as Paracetamol in its portfolio and is moderately valued with a stock market capitalization of €2 billion – that’s a snip for many larger pharmaceutical companies. It’s currently trading at 1.7 times its book value, far below its historical average of two or more. All the shares are widely distributed, so there’s no anchor shareholder to protect the company from a takeover bid.

Another potential candidate is semiconductor maker Infineon, whose chief executive, Reinhard Ploss, last year raised the prospect of being taken over in an interview with the Financial Times when he said: “There is one risk: we are busy in highly attractive markets. That is a strength but maybe we should be aware that people might be interested in Infineon because of that market position.”

Whether intended or not, Infineon’s share price surged 40 percent on that comment, boosting the market value of Germany’s biggest chipmaker by €5 billion. But since December, Infineon’s share price has dropped 20 percent and with a current market value of €13 billion, Infineon would be a bargain for U.S. giants like Intel and Qualcomm.

“Financial markets currently expect that the 30 DAX companies will post equity capital of €740 billion in their balance sheets for the 2016 business year,” said Andreas Hürkamp of Commerzbank. That amounts to a DAX level of 6,900 points — compared with over 9,400 points at present. At that level, the companies’ combined share price would roughly equal their equity capital.

In recent financial history, that’s only happened twice: in 2003 and 2009. Both times, those levels were perfect buying opportunities. Given stable earnings and dividends at most of the companies, investors should “use the current market uncertainty to engage in step-by-step purchases,” said investment strategist Christian Kahler of DZ Bank.

Legendary U.S. Warren Buffett put it more succinctly: “You want to be greedy when others are fearful.”


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Ulf Sommer covers companies and markets for Handelsblatt. To contact the author: [email protected]