The German Miracle Continues: Time to Buy Into It

Frankfurt am Main is not only the financial hub of Germany, it’s the financial hub of Continental Europe.  Frankfurt is home to the European Central Bank (ECB); Deutsche Bundesbank; and Germany’s principal stock exchange, the Frankfurt Stock Exchange.
In the past decade, I’ve visited Germany on many occasions (my wife is German).  This time around it felt a little different. It felt more vibrant.
This sense of vibrancy was confirmed while in Frankfurt.
During a boat tour on the Main River, the guide gushed over Frankfurt – its economic strength and its accession to a world-class financial center.  I thought it interesting when she mentioned Frankfurt is home to 680,000 inhabitants and just as many jobs.
Speaking with Frankfurt-based businessmen, I discovered the city is representative of what is occurring in much of Germany: The economy is robust; it doesn’t appear as difficult to find a job in Germany as it does in the United States.  (On a personal note, my wife has a nephew in Nuremberg who graduated from college with multiple job opportunities.)
But if you’re not in Germany, the vibrancy is masked by numbers: Officially, Germany’s unemployment rate, at 6.7%, ranks higher than in the United States. Its economy grew a mere 0.8% in the first quarter of 2014. That’s hardly reason to boast, but it’s still growth. U.S. GDP shrank 1% in the first quarter.

The German Miracle Continues…

Germany is the bedrock of the European Union. Without Germany, there would be no EU.  This is something I found many Germans are ambivalent about. When I asked a few of them for their thoughts on the EU, at least half were content to see Germany go it alone.  With or without the EU, Germans know Germany will thrive.
To many outsiders, Germany still appears rigid, if not ossified. I have to confess that is the only country I’ve visited that still shuts down on Sunday. Restaurants and coffee shops are literally the only businesses open.
Nevertheless, I like what I saw in Germany and what I heard from the Germans. The ECB’s recent announcement to flood the continent with euros isn’t for Germany’s sake; it’s for every else’s.
In short, income-and-growth opportunities exist for investors willing to venture overseas.
Three opportunities, in particular, pique my interest. They’ve got solid long-term prospects. Plus, they add a little international diversification to a U.S.-centric portfolio. So, Prost!
My first recommendation is a mouthful – Muenchener Rueckversicherungs AG (OTC: MURGY), a large insurance and re-insurer headquartered in Munich. (FYI, Muenchen is German for Munich.)  Muenchener is internationally diversified, offering insurances and reinsurance in Germany, most of Europe, Latin America, Asia, and Africa.
I like Muenchener because of its conservatism, evinced by low debt and unspectacular, but steady, growth. The debt-to-equity ratio is below 16% and premiums collected continually rise. Over the trailing 12 months, Muenchener collected $66.3 billion in premiums, which is nearly $20 billion more than it was collecting a decade ago.
Even if Germany doesn’t grow, Muenchener will because of its emerging market exposure. For now, investors can buy Muenchener shares at only 8.6 times earnings. Concurrently, they can pick up a 4.7% yield, one of the highest among re-insurers.
If you’re interested in a little more growth, consider Adidas AG  (OTC: ADDYY), the large athletic show and apparel maker.  Adidas is an iconic brand that’s been around for nearly 70 years.
But Adidas is still growing. Over the past 10 years, revenue has more than doubled to $19.7 billion from $8.5 billion. Adidas has actually outpaced Nike (NYSE: NKE) in average annual revenue growth.
Adidas is also the better value compared to Nike: Its shares trade at 19 times 2014 EPS estimates, while Nike’s trades at 26 times. On the income side of the ledger, Adidas’ 2% yield is slightly better than Nike’s. What’s more, Adidas has increased its dividend every year for the past five years.
My third pick is a play on international travel, Deutsche Lufthansa AG (OTC: DLAKY). Airbus Industries forecasts that passenger air travel will swell to 6.7 billion people annually by 2032 from 2.9 billion in 2012. Airbus also forecasts 40% of these travelers will be ferried by U.S. and European-based airlines.
Lufthansa is perfectly located to capitalize on this growth trend. Its hub is in Frankfurt, and Frankfurt is the busiest airport in Europe. What’s more, it’s a key international hub for North American, Europeans Middle East, and Asian travelers.
On a personal note, I’ve flown Lufthansa many times, and the service has always been exceptional. In fact, I refuse to travel to Europe on an American-based carrier; their service is too substandard in comparison.
With that said, Lufthansa is going through a rough patch this year, as are many airlines. Management has said operating profits will come in at $1.7 billion for 2014, significantly below prior estimates for $2.3 billion. Lufthansa shares have taken a hit on the guidance change. Good for new investors, because the lower price offers them the opportunity to buy Europe’s premier airline at a discount and to capture a 2.7% yield.

Why Warren Buffett keeps his money outside the U.S. 

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