By Eric Uhlfelder, Investing Across Borders

April 30, 2001

These are certainly difficult times to make a buck on Wall Street. But what if you could turn back the clock and buy Southwest Airlines when it had just left the gate or WalMart before it became a household name? Well, you can, by looking across the Atlantic and into the burgeoning European bourses.

For those who have not tracked what’s been happening on the continent over the past decade, there’s a whole range of investment opportunities trading on stock exchanges from Dublin to Milan. Over the last half of the 1990s, performance of the 10 European markets initially participating in common currency [a.k.a. the eurozone] virtually matched US equities, soaring more than 26 percent annually in local currency terms.

While broad European indices have not escaped the current downturn, the combination of stronger economic growth in the eurozone than in the states and continued structural reforms have together set the stage for a substantial rebound in European shares during the second half of the year. There are a number of European companies that offer a likely way in which to profit from the continent’s revitalization. Below, we’ve profiled just five, all of which have shares that conveniently trade in the United States.

Each of these stocks are responding to different aspects of the economic revolution going on in Europe. First, there’s low-cost Irish airline Ryanair [Nasdaq: RYAAY], which is exploiting airline deregulation. Dutch supermarket giant Ahold [NYSE:AHO] demonstrates a remarkable deftness in executing cross-border acquisitions. Finnish-based global telecom manufacturing leader Nokia [NYSE:NOK] is a classic restructuring story, a 19th-century conglomerate that spun off a slew of unrelated operations and wagered the entire company on mobile communications.

Dutch multi-national insurance leader AEGON [NYSE:AEG] was one of the first European insurers to respond to the looming pension crisis by shifting 90 percent of its operations to retirement-related life plans. And Swiss-based Adecco [NYSE:ADO], the world’s largest temp agency, is exploiting the seismic shift in employment practice from permanent to temporary contract work, which has enabled Europe to finally break its perennial double-digit jobless rate.

Several factors help ease the journey abroad.

First, European corporate management and reporting standards are increasingly aligned with those of the U.S., largely eliminating one of the major risks of foreign investing: the lack of transparency. And this is especially so for the hundreds of European companies that trade every day on the New York, Nasdaq, and American Stock exchanges and meet the same reporting criteria that U.S. companies provide.

Second, the move to common currency has set in motion tremendous public and corporate reform that dwarfs the U.S. experience of the 1980s. Government deficits and debt have been pared by receipts accrued from privatization of blue chip national assets. Corporate restructuring soon followed with diversified companies spinning off non-core assets to firms that could make better use of them. This drove the mergers and acquisitions boom of the 1990s.

High wage-related costs, double-digit unemployment, and more open markets put increased pressure on labor reform to improve efficiency and competitiveness. Common currency also introduced a previously unknown price transparency across the eurozone, enabling companies to purchase materials more cheaply. And with companies freer to shift capital and operations beyond their home borders, governments have begun to realize the need for more competitive corporate and individual tax rates.

Finally, the pension time bomb most European nations face is triggering realization that individually funded retirement accounts with substantial equity exposure is a necessity, further fueling demand for stocks.

If it makes it any easier, equity investors should keep in mind that investing in Europe is not about buying into broad foreign markets; it’s about finding innovative companies who are exploiting fundamental market trends and technology. And the five we feature glowingly reflect that promise.

Dublin-based Ryanair is one of Europe’s most appealing plays. Its business model is deceptively simple: exploit the increasingly deregulated airline industry with cheap, dependable service.

Not so long ago, flying within the continent was more expensive than crossing the Atlantic. By the beginning of the 1990s, with the European airline industry beginning to liberalize, executives at Ryanair decided to chuck its traditional, money-losing way of doing business and ventured over to Texas to see how Southwest Airlines pioneered the low-cost U.S. market. Following Southwest CEO Herb Kelleher’s business model to the T—use of a single plane type, point-to-point no-frills travel, and flying into cheaper secondary airports—Ryanair’s stock took off.

The company enjoys annualized EPS growth rate in excess of 21 percent. Every year it’s been adding a half-dozen planes and routes. And its shares have soared an average of 37 percent a year. Further, Ryanair now books more than 60 percent of its tickets via the Internet, helping to contain costs. And the last quarter’s [31 December 2000] numbers were nothing less than remarkable: revenues up 28 percent, passenger volume up 39 percent, and earnings up a whopping 42 percent. And with Europe’s airline industry still dominated by high-cost incumbent carriers, Ryanair has a whole lot of room in which to expand.

Holland’s Ahold is the third largest food retailer in the U.S. Earnings in the states account for nearly two thirds of corporate earnings. But because it maintains the brand name of stores it acquirers [like the highly popular Stop-and-Shop chain], Ahold’s corporate identity to many U.S. investors is largely a mystery. It shouldn’t be.

The company is among the world’s most profitable retailers. Driven by both acquisitions and organic growth, sales have nearly quadrupled over the past five years to $49.45 billion, with net earnings having soared by more than five-fold to $1.12 billion over the same period.

Over the last twelve months, shares are up nearly 40 percent, it’s price-to-earnings ratio is still a relatively modest 23. Today, the stock is trading just several points from its all-time high. And in today’s market, how many companies can say that?

Unlike most European stocks, Nokia has become a high-tech darling in U.S. equity markets thanks to the tremendous popularity of its cellular handsets and the phenomenal performance of its shares. Over the past four years, sales have more than quadrupled with net profits up more than seven-fold. Despite first quarter 2001 figures coming in on the high-end of most analysts’ projections, Nokia shares have been caught in the high-tech market draft with the stock currently off 50 percent from last year’s high.

This doesn’t automatically make Nokia an obvious Buy. The crash in telecom provider shares has significantly cut into spending. But Nokia has been able to counter this by increasing its dominant position in handset sales [37 percent] and making large strides in network infrastructure development.

The huge Dutch insurer AEGON is a good way to play the rapidly expanding demand for private pensions. The $44 billion company has shifted 90 percent of its underwriting to life insurance—the main vehicle for funding private European retirement plans—and the most profitable branch in the insurance industry.

AEGON enjoys a solid record of strong organic growth and effective acquisition, which included the $9.7 billion acquisition of San Francisco-based Transamerica in 1999. And the affect on the bottom line has been stunning: annual earnings expansion of more than 25 percent and five-year annualized stock gains of 20 percent.

Because AEGON’s managed accounts are increasingly geared to stocks, the company has been hurt by the dismal performance of the market and its share price is selling near its 52-week low, making it a bargain at current prices.

Increasingly more flexible business practices and labor policies throughout Europe and around the globe are propelling the rapid growth of temporary staffing. And Adecco is the industry leader, garnering more than 12 percent of the business. This has led to stunning financial growth. Between 1996 and 2000, annual revenue and operating income have been growing by 45 percent a year. Over the past four years, since the French-Swiss merger that created the company, Adecco shares have tripled.

The stock is trading 30 percent off its 12-month peak in response to the feared impact the current economic slowdown will have on temporary and contract hiring. First quarter 2001 sales were up 30.6 percent and operating earnings grew 38 percent. While these numbers may have disappointed Wall Street, they delineate a business model that’s still thriving in these more challenging times. And for investors looking past the present downturn, Adecco shares should offer substantial value, especially as business increasingly relies on temporary and contract work to cautiously expand out of the present economic slowdown.