Europe’s Magnificent 7 Stocks Are Profitable – And Cheaper

• GSK
(GSK)

•
Roche
(ROG)

•
AstraZeneca
(AZN)

•
ASML
(ASML)

•
Nestle
(NESN)

•
Novartis
(NOVN)

•
Novo
Nordisk
(NOVO
B)

•
L’Oreal
(OR)

•
LVMH
(MC)

•AstraZeneca
(AZN)

•
SAP
(SAP)

•
Sanofi
(SAN)

What
do
the
Granola
Stocks
Have
in
Common?

Those
companies
were
among
the
most
valuable
in
the
continent
but
also
had
several
strong
characteristics:
solid
earnings
growth;
defensive
and
low
volatility;
high
and
stable
margins;
strong
balance
sheets;
vompounders
with
sustainable
dividends.

In
a
report
released
on
April
28,
2020,
the
bank’s
strategists
wrote:
“In
the
US,
tech
is
still
likely
to
remain
the
long-term
winner.
In
Europe
it’s
more
likely
to
be
a
combination
of
structurally
strong
and/or
stable
sectors:
healthcare,
consumer
staples
and
tech.
The
largest
stocks
in
these
spaces
we’ve
dubbed
the
‘GRANOLAS’:
GlaxoSmithKline,
Roche,
ASML,
Nestle,
Novartis,
Novo
Nordisk,
L’Oreal,
LVMH,
AstraZeneca,
SAP,
Sanofi.
They
might
not
ALL
do
well,
but
they
generally
have
some
growth
and/or
stability
in
earnings
and
DYs
in
the
2-2.5%
range.”

The
bank
updated
its
views
last
week,
underlying
the
fact
that
the
GRANOLAS
stocks
had
little
to
envy
the
US’s
“Magnificent
Seven”,
an
expression
that
has
been

attributed
to
Bank
of
America’s
strategist
Michael
Hartnett,
in
reference
to
the

1960s
movie
(itself
a
remake
of
Akira
Kurosawa’s
masterpiece,

Seven
Samurai,
released
in
1954).

Starting
from
their
research,
we
looked
at
the
most
valuable
companies
in
the

Morningstar
Europe
index
and
also
extracted
valuation
and
fundamentals
data
from
other
databases
to
understand
the
underlying
drivers
of
the
outperformance,
looking
back
to
2021.

No
Trillion
Euro
Stocks
–
Yet

First
of,
there
are
no
trillionaires
(yet)
within
the
list
when
compared
to
the
US
counterpart
which
already
had
five
at
the
end
of
January.
The
most
valuable
company
in
Europe
is

Novo
Nordisk,
the
Danish
pharmaceutical
company
whose
Ozempic
obesity
drug
has
helped
propel
its

earnings
to
new
highs
with
a
market
value
of
€400
billion.

The
“smallest”
of
the
European
Magnificent
Seven
(M7)
is
luxury
company

Hermès
International,
worth
€200
billion
(see
table).

Some
investors
have
started
wondering
when
we
will
see
a
trillion-euro
company
in
Europe.
One
might
just
need
to
wait
for
a
new
wave
of
irrational
exuberance,
but
unless
the
“obesity
cure”
becomes
as
exciting
as
AI,
this
might
not
come
any
time
soon.

Europe’s
Global
Leaders

The
second
big
difference
with
its
US
equivalent
is
the
diversity
of
sectors
represented
within
the
list.

The
list
has
a
tilt
towards
healthcare
(32%),
consumer
defensive
(26%),
consumer
cyclicals
(29%)
and
tech
(14%).

While
the
US
version
of
the
M7
is
only
tech,
its
European
counterpart
has
only
one
–

ASML
which
is
not
a
software
or
an
Internet
company,
but
the
global
supplier
of
vital
production
equipment
to
the
global
semiconductor
industry.

One
characteristic
of
the
list
is
that
it
is
home
to
global
leaders
in
their
respective
fields:

Nestlé
for
food,

LVMH
for
luxury,

L’Oreal
for
cosmetics,

Novo
Nordisk
for
diabetes.

It
is
also
populated
with
some
of
the
largest
pharmaceutical
companies
in
the
world,
notably

Roche.
The
list
in
the
table
also
includes
Novartis,
Sanofi,
AstraZeneca
and
GSK
which
are
among
the
top
10
largest
pharmaceutical
companies
in
the
world.

Since
2021,
the
average
return
of
the
European
M7
companies
has
been
very
solid.
On
a
total
return
basis
in
euros,
an
equally
weighted
portfolio
of
the
companies
would
have
doubled
in
value,
with
a
cumulative
total
return
of
103%
as
of
Feb
19,
compared
with
a
cumulative
total
return
of
128%
for
its
US
counterparts.

Europe
and
Magnificent
7
Stocks
vs
the
Stoxx
600

Source
:
Morningstar
Direct,
Factset
:
Morningstar
Direct,
Factset.
In
euros.
Total
return.
Base
100
=
January
1 ,
2021

We
looked
at
historical
return
on
equity
as
a
measure
of
profitability.
This
measure
is
far
from
perfect,
in
particular
for
companies
whose
profitability
has
been
driven
mostly
by
intangible
assets,
be
it
brands,
patents
or
client
relationships.

Yet
it
gives
an
idea
of
how
profitable
the
M7,
both
in
Europe
and
the
US,
are.

Europe
and
Magnificent
7
Stocks
–
Return
on
Equity

Source
:
Morningstar
Direct,
Factset
:
Morningstar
Direct,
Factset.
In
%
from
Janaury
1,
2021.

This
chart
shows
several
things.
First,
both
groups
have
seen
their
return
on
equity
improve
over
the
last
few
years.
Second,
despite
being
more
volatile,
the
M7
of
the
US
have
been
significantly
more
profitable
than
their
European
counterparts.

European
Stocks
at
a
Discount

Finally,
we
can
look
at
valuations.
The
table
below
gives
some
useful
information
based
on
Morningstar
proprietary
metrics,
which
can
be
useful
to
help
investors
pick
investment
ideas.

We
also
looked
at
more
classical
valuation
ratios
using
consensus
data
to
assess
if
the
higher
profitability
of
the
US
M7
is
justified
and
if
they
trade
at
a
premium
to
their
European
counterparts.

The
chart
below
shows
that
thanks
to
increasing
return
on
equity,
the
valuation
ratios
has
been
declining
over
the
last
few
years.

But
despite
this
decline,
both
sets
of
stocks
trade
at
a
significant
premium
to
their
respective
markets.

Magnificent
7
Stocks
Trade
at
31x
Earnings

In
Europe,
the
Magnificent
Seven
subset
currently
trades
at
31
times
earnings
expected
for
the
next
twelve
months,
based
on
consensus
data
from
Factset,
which
a
historical
average
of
30
times
since
2021.
This
compares
with
a
European
market
that
currently
trades
at
13
to
14
times
forecasted
earnings.

In
the
US,
the
M7
currently
trades
at
34
times
earnings,
compared
with
a
historical
average
of
close
to
40
times
since
2021
(they
also
trade
at
a
premium
to
the
US
market
which
trades
at
about
20
times
earnings).

The
historical
premium
of
the
US
M7
to
their
European
counterparts
makes
sense
considering
their
higher
return
on
equity.

And
the
European
list,
which
is
equally
weighted,
is
influenced
by
the
very
high
valuation
of
specific
companies,
especially
ASML
and
Hermès
International
which
trade
at
a
P/E
multiple
of
circa
43
and
49
times
respectively.

P/E
Ratio
of
European
and
Magnificent
Seven
Stocks

Source
:
Morningstar
Direct,
Factset
:
Morningstar
Direct,
Factset.  In
%
terms
from
Janaury
1,
2021.

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