Last year, our analysis found specific opportunities in the defensive sectors in Europe, including consumer staples. More recently, we're focusing on securities in the more cyclical sectors of the market, including financials, consumer discretionary, technology and certain materials.
This approach of using a quant model to cut through the "noise" and pinpoint interesting investment ideas is demonstrated through two specific examples. The woes of Europe's financial sector names are well known and hardly a day goes by without some other negative news headline. But consider Germany's Allianz, Europe's largest insurer by market capitalization and the world's largest property and casualty insurer. Its global footprint is key but more than two-thirds of its revenues are generated within Europe.
Despite Allianz's strong business model, many worry about its balance sheet risk, specifically the high level of exposure to European sovereign bonds. We take a different view, and after examining the company's balance sheet are comfortable with the quality and end market exposures of the bond portfolio. We also take comfort in the underlying sector dynamics, and Allianz's performance of generating strong returns and cash flows. We believe valuation is also compelling: Allianz trades at a p-e of 8x, a price to book ratio of 0.9x and offers a dividend yield of 5%.
Similarly, the Spanish information technology sector is not necessarily an obvious choice for finding opportunity now, we like Spain's Amadeus IT Holdings. It is a leader in information technology systems and services to the global airline industry. In one of its two main business lines, global distribution services, Amadeus aggregates flight information and supplies it to travel agents. Within the GDS market, Amadeus commands approximately a 40% global market share. Its second line of business is outsourced IT solutions for the airline industry. Amadeus believes it has a technology edge over competitors, a lead it continues to invest in through R&D.
Amadeus' fundamentals also appear to be strong. It has a highly cash generative business and a strong growth profile. Dividend payouts are expected to increase as net debt is paid down. It also trades at an attractive p-e and a discount to its peers globally.
Of course, in both cases there are risks. Among the risks for Allianz would be a substantial deterioration in European government bonds. With Amadeu,s the risks include macroeconomic events impacting global airline passenger volumes, or a shift by consumers moving to direct bookings by airlines and bypassing GDS.
Only fundamental analysis can verify the trust any manager puts into his or her way of narrowing the investible universe to find the most worthwhile ideas. We believe that this "trust the model, but verify" philosophy is key to finding value in Europe.
Spencer Mellish is a senior portfolio manager for AGF Investments/Highstreet's non-Canadian equity mandates; international, global and U.S. equities.