The Valuation Gap: European Companies Trading at a Discount to U.S. Counterparts
Europe’s economy continues to follow a familiar path of low growth and low inflation. The 19-member euro zone is recovering from global and local financial crises; however, it is doing so at a significantly slower pace than the United States and the United Kingdom. Economic growth around 1.5% has become the norm, along with an unemployment rate hovering around 11%.
Stubbornly low inflation and occasional bouts of deflation have the European Central Bank virtually promising more quantitative easing in 2016. A resulting decline in the value of the euro should help boost exports, tourism and consumer spending.
Despite the challenges, potential opportunities are emerging in various corners of the continent, including homebuilders addressing pent-up housing demand, and toll road operators expanding amid Spain’s economic recovery. What’s more, valuations appear relatively attractive in a number of areas.
European companies sometimes trade at a significant valuation gap to U.S. counterparts. The chart above shows examples of this trend across four industries. Consider the pair of conservatively managed financial institutions: Wells Fargo and Lloyds. Although their end markets are quite different, their business models have similarities. An argument could be made that Lloyds looks more attractive trading at a price-to-earnings ratio of 9.4, compared to Wells Fargo’s 12.6.
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