Monday, August 3, 2020

Dax shares are currently more expensive than before the stock market crisis

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Trading hall of the Frankfurt stock exchange

Anyone who trades in the shares of large German companies should keep an eye on the price-earnings ratio.

(Photo: dpa)

Dusseldorf Missed the turnaround? This is the question many investors are asking after the stock markets have risen by an average of 30 percent worldwide since their low in mid-March. The hope that the pandemic will soon be contained and economic stimulus packages worth billions fuel speculation that companies will emerge from the crisis as quickly as they have slipped into it due to the economic standstill.

But rapidly increasing prices in combination with falling profit expectations among companies make the shares and the entire DAX expensive. Even more expensive than before the stock market crisis. “There is a lot to be said for this,” says Chief Volkwirt Carsten Klude from the M.M.Warburg wealth management, “that there is a high probability that there will be even cheaper entry-level courses in the foreseeable future.”

From the perspective of those who missed the turnaround, the chances are good. Despite the corona pandemic and the economic standstill, the financial market experts had left their earnings estimates for the company unchanged for a long time. This gave the shareholders the (wrong) impression that the companies could earn at least as much this year as in the previous year. This made stocks look cheap after prices plummeted and the Dax was trading 40 percent lower in mid-March than it had in February.

But now the analysts are cutting their estimates – and more drastically than ever: since February by an average of 25 percent for the 30 DAX companies. Every day, the analysts continue to adjust their forecasts downwards. “This year, corporate profits in the Dax could collapse by 50 percent and more, more than in previous recessions,” said DZ Bank chief investment strategist Christian Kahler.

For 27 of the 30 Dax companies, earnings estimates have fallen in the past three months: most strongly at Daimler, Adidas and Continental, where they have been revised down by more than 60 percent. Deutsche Bank, Covestro and Lufthansa should even slip into the red in 2020. Just over a week ago, a small profit was expected for Covestro, at Lufthansa the forecast of two billion euros in profit has now been turned into at least two billion euros in loss.

The result: stocks suddenly become drastically more expensive. Before the crisis broke out, when the Dax rose to 13,789 points, investors paid the shares of the 30 Dax companies with an average of 16 times the expected net profit in the current financial year.

The price-earnings ratio (P / E) calculated in this way fell to nine and a half in the March market crash. Shares suddenly appeared cheap. But only because initially nothing changed in the profit estimates. The courses then recovered by 30 percent. At the same time, however, analysts cut their earnings estimates after the consequences of the economic standstill became increasingly apparent.

Poison for the stock market prospects

Rising prices with rapidly falling profit estimates – this is poison for the stock market prospects. The P / E ratio for the 30 DAX companies has now risen to 17. Shares are therefore still somewhat more expensive than before the crisis – and that at a stock exchange level that is more than 20 percent lower. Only with the difference that “the uncertainties are much greater today,” warns M.M.Warburg-Volkswirt Klude: “That is why we currently consider German shares to be too expensive to make long-term investments right now.”

His advice to investors is to wait until expectations regarding corporate earnings have bottomed out over the next twelve months, until expectations are no longer reduced. In the stock market downturn in 2003 and in 2009, this was a reliable indicator for reaching a sustainable turning point in the stock market.

With his summarizing advice: “Wait and drink tea”, the chief economist from Hamburg is in good company. Star investor Warren Buffett has not yet used the lower prices for acquisitions. For years Buffett has been desperately looking for suitable investment opportunities to invest his interest-free cash. But the ratings always seemed too high for him.

When global equity markets tumbled more than 25 percent in March, Buffett and his partner Charles Munger and their holding, Berkshire Hathaway, held back – and they even increased their cash reserves. Berkshire had $ 137 billion in cash at the end of the first quarter. That is a new record.

graphic

However, the profit prospects have not worsened for all companies in the Dax. The recent balance sheets for the first Corona quarter prove this.

The Bayer Group reports that its agricultural and pharmaceutical business has benefited from customer purchases due to the corona pandemic. Sales increased by five percent in the first quarter, and profits by a good 20 percent.

The American analyst Bernstein Research then raised its price target for Bayer shares to EUR 88 – the share would have a potential of 50 percent compared to the current price of EUR 58 – and left the rating at “above average”. The agricultural business is expected to develop stably in view of the strong start to the year.

Although the anticipated demand may even out in the coming months, Bayer’s good quarterly figures show that there have been no negative effects due to the global economic standstill.

Accordingly, the profit estimates for the pharmaceutical company have only deteriorated by two percent in the past three months and thus only minimally. With a P / E ratio of 8.4 based on the earnings expected for 2020, Bayer shares are currently the cheapest share in the Dax. This is exceptional for a large company in the pharmaceutical industry that is traditionally rated above average.

The reason for the high markdown is the legal dispute over Roundup, a glyphosate-containing plant protection product, in which Bayer now faces over 50,000 plaintiffs. A possible comparison that has been negotiated for months should cost Bayer at least ten billion euros, according to analyst estimates. But as long as the dispute is not finally settled, so that no new lawsuits threaten, the course and thus the evaluation remain capped.

Deutsche Börse and Telekom are more robust

Another company that has had no major adverse effects from the corona crisis is Deutsche Telekom. Analysts have not revised their earnings expectations for the Group in the past three months. The economic standstill is forcing many employees into the home office and families home. Accordingly, more than fewer offers from Deutsche Telekom are in demand.

Given the 10 percent drop in the price since the start of the corona pandemic in February, the valuation of the T-Share has been reduced to 13 times earnings. Most analysts see potential at the current price of around 13 euros.

The Swiss bank UBS recommends buying the share with a price target of EUR 20.30 as well as HSBC. The British-Asian bank estimates 17 euros for the share. HSBC analyst Adam Fox-Rumley sees the European telecommunications sector as comparatively robust in view of the effects of the corona crisis. In unison, analysts consider Telekom’s dividend to be safe. With 60 cents per share going to shareholders this year, the dividend yield is 4.6 percent.

The Dax group Deutsche Börse has so far come through the crisis well. The stock exchange benefited from rising trading volumes in equities, interest rate and index derivatives – both in the rapidly falling stock exchanges in March and in the sudden recovery in April. The volume was significantly above average in both months. That is what the stock exchange earns.

Analysts have therefore raised earnings estimates for the current year by two percent. The share remains an investment favorite, judged Deutsche Bank analyst Benjamin Goy after presenting the balance sheet for the first quarter. In the first three months, net sales rose by 27 percent due to the significantly higher market volatility, earnings per share even increased by 33 percent to EUR 2.11 per share. So no trace of the crisis.

But as almost always on the stock exchange, quality has its price in this case too. The stock of the exchange operator is not cheap with a P / E ratio of 22.5. The price rose by 20 percent within a year. And further profits are especially attractive if the stock exchanges continue to fluctuate.

More: Despite Corona losses: Dax companies pull back share purchases for five billion euros

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