The Granolas: Europe's heavyweight stocks
The Granolas are Europe’s stock market heavyweights. They have been likened to the USA’s Magnificent Seven (discussed here). Unlike the Magnificent Seven, the Granolas consists of eleven companies. Looking at the names, GRANOLAS is clearly short for GRANNNoLLASS.
The Granolas are spread throughout Western Europe and almost half of them are from the pharmaceutical industry.
Granolas financial metrics
Let’s look at a few financial metrics to get a feel for the Gran
olas. In the table below, we calculated 5-year average numbers for everything except interest expense, where we used the last financial year’s numbers. A cursory glance at the table will demonstrate that most of the Granolas are pretty nifty companies.
ROCE is return on capital employed. It is the return on the money in the business. You can think of ROCE like the interest rate that you get on your savings account. As a rule of thumb, anything above 10% is respectable. As you can see, for all except AstraZeneca and Sanofi, ROCE is quite good.
Gross Margin is the profit margin remaining after removing the cost of the goods sold. With gross profit margin, it is not a simple case of higher is better. Different industries have different margins because of the products they sell. Pharmaceuticals tend to have high margins and that is visible here. The food industry has lower margins and that is why Nestle has lower numbers.?
Operating Margin is the profit margin remaining after removing all expenses. This is an important number because it shows whether the core operations of the business are profitable. All the Granolas are profitable. You will notice that Nestle has a higher operating margin than AstraZeneca, even though it has a lower gross margin. That tells us that AstraZeneca has relatively higher selling, general and administrative costs than Nestle.
Cash Conversion is the amount of cash generated compared to net profit. Net profit is based on accrual accounting and can be manipulated. Cash conversion allows us to check if profit is turning into cash. For most of these companies the cash conversion is above 100%, which is very good.
Interest Expense shows the amount of operating profit that is used to pay interest on debt. Lower is not necessarily better, this number must be judged in the context of the industry that the company operates in. We have five pharmaceutical companies. Their interest expense averages 6%. From that we can see that AstraZeneca is far above the average at 11.7% and Novo Nordisk is far below at 0.5%.
Conclusion
The US markets are extremely hot at the moment, especially the Magnificent Seven stocks. It is a good idea to look far and wide and find good companies where valuations are more reasonable. On average, the Granolas are trading on lower valuation multiples than the high flying US stocks. So they may be worth looking at.
In fact, you may have already recognised a few names from the list, such as Novo Nordisk which is in our Extraordinary Companies portfolio (available here) and LVMH which is on the ROA Watchlist (available here). I think there are a few other names that might be worthy of joining the watchlist. We will crunch some numbers and discuss those in a future edition of ROA.
This article was first published in the Rule of Acquisition.
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