Germany has the fourth largest economy in the world and the largest economy in Europe. The country is a true powerhouse which has rebuilt itself multiple times after world wars. Its central location in Europe attracts many international companies to build factories and open offices. For example, Tesla (TSLA, Financial) opened its Gigafactory Berlin in March 2022.
Most investors succumb to what is called a “home bias" in that they overly invest into their own country. However, global diversification can help reduce country-specific risks. Thus, this article will go over my three favorite German stocks; let’s dive in.
1. Mercedes-Benz Group AG
Kicking things off with my favorite German stock, we have Mercedes-Benz Group AG (MBGAF, Financial). The company was founded in 1926 after the world's first car was made by Karl Benz in 1885. Thus it is easy to say that the company has the oldest roots in the automotive industry.
Mercedes-Benz has developed a plethora of middle market luxury vehicles which range from the compact A-class to the S-class Saloon and even the iconic G-Wagon.
In recent years, the company has expanded product range to include a range of electric vehicles. Its flagship model is the EQS, which has been critically acclaimed and has a massive range of between 350 and 487 miles. As a comparison, Tesla’s popular Model S has a range of 412 miles. The EQS also includes luxury leather versus Tesla’s synthetic leather.
The electric vehicle industry was valued at $170 billion in 2021 and is forecast to grow at a solid 23.1% compounded annual growth rate, reaching a value of over $1 trillion by 2030, according to Precedence Research.
Mercedes has proven that it can produce high quality electric vehicles and thus now has the challenge of converting its internal combustion engine plants to cover more EVs.
The European Union has confirmed that it will stop the sale of new fossil-fuelled cars by 2035, thus Mercedes has a large challenge but also opportunity ahead.
Growing financials
Mercedes reported strong financial results for the third quarter of 2022. Revenue was $37.72 billion, which increased by a solid 19.18% year over year and beat analyst estimates for growth.
The company also reported strong net income of $3.92 billion, which grew by over 58% year over year, while its operating income increased by 57% year over year to $4.35 billion.
Mercedes has a solid $15.42 billion in cash and cash equivalents on its balance sheet. However, the company does have high total debt of $110.6 billion, which is expected for a legacy automotive company. The positive is, I believe this metric includes many operating leases and non interest bearing debt, which is manageable.
Valuation
Mercedes trades at a price-earnings ratio of 3, which is substantially cheaper than historic levels.
However, the GF Value chart does indicates a fair value of $55.80 per share and rates the stock as significantly overvalued.
2. Allianz SE
Allianz (ALIZF, Financial) is a German multinational financial services provider which has over 86 million customers globally. The company operates across a variety of business segments which include insurance, asset management and investment banking. It generates revenue through the sale of insurance policies as well as investment products. In addition, the company charges fees for its financial advice and consulting and generates income from its own asset portfolio.
Financial review
In the third quarter of 2022, Allianz reported a staggering $105.8 billion in total revenue, which declined by nearly 6% year over year. This wasn’t great to see but it looks to have mainly been impacted by the macroeconomic environment.
A positive is the company has continued to produce strong profitability. The company reported $10.99 billion in revenue for the third quarter of 2022, which increased by 3% year over year. This was driven by strength in its Property and Casualty business, as well as growth in its Life Insurance segment.
Its Life Insurance business reported solid margin improvements year over year. Its asset management segment reported outflows, which was expected due to the macroeconomic environment.
Management showed confidence in the business prospects by announcing $1 billion in buybacks. In addition, the company paid out $4.5 billion in dividends during 2022. As the company has a 4.95% dividend yield, it is great for income investors.
Valuation
The GF Value chart indicates a fair value of $221 per share for Allianz, making it fairly valued at the time of writing.
Its price-earnings ratio is 12, which is close to its historic levels.
3. Fraport
Fraport (FRA:FRA, Financial) in an airport services company which owns Frankfurt Airport, as well as operating an number of airports across Europe and South America.
The company owns Frankfurt Airport on a “freehold” basis, which is a rarity in the industry. In addition, the airport is partially owned by the government, which further helps secure its position. The beautiful thing about airports is they tend to have high barriers to entry, as its require a huge amount of capital expenditure to set up one. That is of course assuming government regulation enables this, which is hard to get normally. Permits for other airports nearby are also less likely to be given, as there is only room for so much competition.
Fraport's other airports in Brazil and Peru are also poised to benefit from growth tailwinds as these are emerging markets and have become popular travel destinations in recent years.
Financial review
In the third quarter of 2022, Fraport reported revenue of $1 billion, which increased by a rapid 24% year over year. In addition, its revenue beat analyst expectations by $38 million. Overall this is a fantastic growth rate given airports are generally categorized by slow growing revenue. However, they do benefit from travel seasonality and other factors. For example, in 2020 as travel shut down, airport share prices plummeted. However, in 2021 and 2022, travel has had a major rebound which has boosted traffic and usage of airports.
The company reported solid net income of $263.4 million for the quarter, which increased by a rapid 66% year over year.
Valuation
Fraport trades at a price-sales ratio of 1.45, which is nearly 6% cheaper than its five-year average.
The GF Value chart rates the stock as undervalued but also a possible value trap due to declining financials.
Final thoughts
Mercedes, Allianz and Fraport are three strong German companies in very different industries. The companies offer diversification into Europe and exposure to different sectors. Europe is currently going through a tough time due to the Russia-Ukraine war and energy security issues. In addition, a large sell-off in the Euro relative to the dollar hasn’t helped. However, for U.S. investors, it actually means Euro-dominated assets can be purchased cheaper. I believe Fraport represents the best value opportunity on the list due to its simple business model and high barriers to entry.
