At ~22x forward price-to-earnings, the US stock market continues to trade near the highest valuations of the past 40 years. In contrast, most global stock markets outside the US continue to trade near or below long-term average multiples. As shown below, on a relative basis, global valuations have never looked so cheap relative to those of the S&P 500.
Source: Scotiabank GBM Portfolio Strategy, LSEG.
With so many investors crowded in US stocks, we have been increasingly finding opportunities elsewhere. In the last two quarters, QV’s Global Equity Strategy has added two new European businesses, Melexis and Instalco and increased positions in two existing European holdings. These companies were all added at meaningful discounts to their historical valuations and cumulatively add to the broader portfolio’s return on equity and long-term growth characteristics.
Recent Purchases of European Businesses
Source: QV Investors, S&P Capital IQ
Below we highlight three of these recent additions:
Melexis NV
In May, we added a position in Melexis, a Belgium-based global semiconductor company that designs and develops microchips and sensors for the automotive industry. Despite the low growth, cyclical nature of the auto market, Melexis has enjoyed high growth at attractive returns on capital for many years. As vehicles have become more automated and electrified, they have required an increasingly higher reliance on microchips. Since 2017, the number of microchips that Melexis sells per auto produced globally has risen from 10 to over 20. Over the next decade, we expect secular trends in premiumization, autonomous driving and electrification to drive strong continued demand for the chips Melexis produces.
We increased our weight in August, purchasing Melexis at a historically attractive average of 15.4x forward earnings relative to the 10-year median of 23.4x. With a 4.5% dividend yield, and the potential for strong revenue growth, we think Melexis’ future return prospects are attractive. Insiders are highly aligned with shareholders with 50% ownership of shares outstanding, and along with Melexis’ strong balance sheet, we think Melexis’ shares provide investors with a reasonable margin of safety.
When assessing the impact of this purchase on the strategy, 60% of Melexis’ metrics, such as valuation, returns on capital, and leverage, were above the strategy average. To put this into perspective, Melexis ranked as above average in 6 of QV’s 7-Tests, making it a clear positive stand out. When a business of this quality trades at a substantial valuation discount, it can often prove to be an attractive opportunity.
Alten S.A.
Alten is a French engineering and technical consulting business that we have owned in the strategy since 2020. The company has been a consolidator in its fragmented industry and is benefitting from a secular tailwind of corporations outsourcing research & development to firms like itself. These forces have allowed Alten to grow the number of engineers it employs from ~18,000 in 2015 to over 50,000, resulting in consistently attractive revenue growth at reasonable returns on equity.
Over the summer, we more than doubled our weight in Alten at an average of 12.4x forward earnings, well below the 10-year average of 17.3x. On a price-to-book basis, Alten was, and still is, trading at a 10-year low. We believe the market is overreacting to soft near-term growth in 2024 and the current share price is not reflective of long-term business fundamentals. Alten has a net cash balance sheet that provides investors a layer of downside protection through uncertain economic periods, and its CEO and founder, Simon Azoulay, is highly aligned with shareholders as he owns 15% of Alten’s shares. As long-term owners, we believe that these factors combine with the current valuation to offer a margin of safety and a reasonable entry point for mid-to-long-term return prospects.
WH Smith PLC
We’ve owned WH Smith, a UK-based travel retailer with over 1,750 stores in hospitals, railway stations and airports, for over a decade. We added to our position in June and July as shares fell to ~12.5x earnings. Among other portfolio holdings, it was trading at the fifth largest discount to its 10-year average forward price-to-earnings. We expect new store openings, like-for-like sales growth and the resumption of share buybacks to drive double-digit earnings growth in the next three to five years. Combined with a 2.6% dividend yield, we think attractive returns can be generated from a historically low starting valuation.
While we’ve only highlighted a few recent additions, over the last two quarters we have also added to several other global businesses where we see attractive valuations and strong future return prospects. With so much of the investing world focused on highly valued US stocks with very high expectations for future growth, we continue to think good opportunities can be found elsewhere with lower valuations, better returns prospects and importantly, lower risk.
