BT Group plc (ADR) (BT), Ryanair Holdings plc (ADR) (RYAAY): The Top European Ideas for Your Portfolio

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BT Group plc (ADR) (NYSE:BT)Europe is still going through a tough recession. While Germany stays strong thanks to its unparalleled industrial power, countries such as Spain and Italy remain under pressure. That said, investing has a lot to do with expectations. As professor Michael Mauboussin (who is the head of global financial strategies at Credit Suisse) used to say in his classes, investment success equals reality minus expectations. And expectations for Europe are, indeed, remarkably low. Let’s see three European companies that might help your portfolio going forward.

A top global sporting company growing earnings at full speed

Adidas is growing its top-line while ameliorating its earnings faster than ever. The company has an attractive margin expansion story which I expect to fuel an 18% EPS Compounded Annual Growth Rate (CAGR) until 2015 – versus NIKE, Inc. (NYSE:NKE)‘s 12%. Besides, the Adidas brand is having great momentum in emerging economies like Russia and China, where consumers elected Adidas as the top brand (ahead of Nike).

Of course, I cannot forget Adidas’s strong balance sheet (it has more than $1 billion in net cash) and the management’s focus on increasing shareholder cash returns through dividends (which are growing at 15% year-over-year rate). Adidas trades at 14.8 times expected 2014 earnings while Nike and Puma trade at 18.1 times and 15.2 times respectively.

One airline to look at

Even if its true that nobody made money in the airline industry (except a few world famous people), I think you should keep Ryanair Holdings plc (ADR) (NASDAQ:RYAAY) in your watch-list. The reason is simple: I think there is huge room for margin expansion in the coming years to +20% EBIT margin from the current +14.5%. This margin expansion should come from a pricing environment that will keep on improving as European seat capacity shrinks and from the company’s cost cutting policies.
Besides, the company will sustain its focus on its 2014 7% free cash flow yield target, and management has confirmed a planned $1.3 billion return to shareholders in the form of share buybacks and a special dividend over the next two years. Because it is trading at 15.7 times 2014 earnings, I think you should keep this airline on your list of companies to follow closely.

Cutting costs could significantly improve earnings

BT Group plc (ADR) (NYSE:BT) is still one of the least efficient incumbent telecom companies in Europe, and the market seems to be under-appreciating the significant cost-cutting opportunities the company could benefit from. On the other hand, BT Group plc (ADR) (NYSE:BT) is growing fast in the high-margin UK high-speed broadband market, which is allowing the company ameliorate its Revenue Per Line (RPL). As a matter of fact, fiber adds accelerated again during the first quarter of the year to 211,000 retail fiber subscribers, versus 200,000 during the fourth quarter of 2012.

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