Italian stocks are trading cheaply, if price/earnings ratios are anything to go by. While many companies and the country’s economy, the third-biggest in the euro area after Germany and France, may be struggling, some have the scope to rebound.
Italian companies have long traded at a discount. Poor productivity, elevated levels of government debt, and an aging workforce are weighing on growth. The economy stagnated in the third quarter after contracting 0.4% in the second. But now, the gap between Italian stocks and the rest of the world has grown to the widest since 1998, according to data compiled by Reuters, and twice the average discount of the past 20 years.
Dow Jones data show the average price/earnings ratio on Italy’s benchmark
iShares FTSE MIB UCITS
exchange-traded fund is 12. For the S&P 500 index, it’s 20, and for the
iShares MSCI World
ETF, it’s 19. In October, the International Monetary Fund predicted that Italy’s gross domestic product would grow 0.7% this year and next. That compares with 2.1% and 1.5% for the U.S. in 2023 and 2024.
Giorgia Meloni has struggled to make progress in balancing the books since becoming the country’s first female prime minister in October 2022. Rising interest rates from the European Central Bank have raised the cost of servicing the country’s debt, which, at more than 140% of GDP, is the second highest in the euro area behind Greece. A windfall tax on banks drew criticism and was scaled back shortly after being announced in August.
Nevertheless, Italy is home to a number of high-performing companies, and some with a low P/E ratio may be undervalued and worth buying. For example,
UniCredit,
one of the country’s biggest banks, has a P/E ratio of just 5.6. That puts it at a 10% discount to peers. Its Milan-traded shares have gained more than 85% this year, and the company gets 15 Buy ratings and two Holds among those surveyed by
FactSet.
Johann Scholz, an analyst at Morningstar, says the bank recently turned a corner. “The transformation of
UniCredit
in two years from a perennial underperformer to one of the most profitable banks in Europe has been astounding,” he said in a note. “UniCredit is now comfortably generating mid-double digit returns, despite being one of the best-capitalized banks we cover in Europe.”
Another undervalued Italian company is oil firm
Eni,
with a P/E ratio of 6, in line with peers. Still, its slightly larger European rivals are more highly valued—
BP
is priced at 6.7 times forward earnings, and
Shell
is at 7.7. Eni’s shares are up 12% this year, even though crude-oil prices are down about 5%. If oil prices stay higher for the foreseeable future—and Russia and Saudi Arabia have shown they’re willing to restrict output to prop up prices—Eni could be a good bet.
Anyone following the auto workers strike this year will be familiar with
Stellantis,
the auto giant that owns the Chrysler, Dodge, Fiat, Jeep, Alfa Romeo, and Maserati brands. Its P/E ratio stands at a shockingly low 3.4.
Ford Motor,
by contrast, is at 6.7, and
General Motors,
at 4.2.
Stellantis
shares have nevertheless gained 43% this year and get 16 Buy ratings and just one Hold on FactSet.
Finally, there’s
Ferrari,
a Barron’sstock pick from January. Rather than a very low P/E ratio, the sports car maker has a very high valuation of 44, more like a luxury brand than a car company.
Yet many are still bullish on the stock, which has gained 70% so far this year. Its high-profit margins and potential for faster growth than its mass-market peers make it attractive. It will also soon start making electric vehicles, which, if they become as desirable as Ferrari’s gas-guzzling lines, could create even more room to grow.
Italy’s stock market may be in the doldrums, but there could still be some diamonds in the rough.
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