I wanted to share some highlights after recently returning from a conference held in Munich, Germany. The conference was an excellent opportunity to get updates from two dozen leading European industrial and consumer businesses.
A consistent theme in company meetings was the view that we are likely nearing, or are at an economic bottom in Europe. While almost all remained cautious, some were beginning to see signs of improvement and most believe a worst case scenario has been avoided. In Germany today, while consumer demand is far from robust, finding quality skilled labour remains challenging. In more pressured economies such as Spain some auto OEM’s noted reducing incentive levels, often an encouraging sign.
As discussed in an earlier post, Europe has been an area that we have been adding to over the past year driven by many companies operating well below normalized levels, combined with reasonable valuations. While some businesses have revalued to a degree, there remain a number of attractive opportunities for our various funds.
A theme getting a lot of attention was how auto OEM’s will cope with demanding fuel economy requirements over the next decade. Solutions will need to include a wide variety of advancements in the form of light weight materials, powertrain technologies along with engine downsizing and the related challenges this creates. There are a number of companies, which in addition to benefitting from this these trends generate attractive economics and trade at reasonable valuations. Being able to meet with businesses through the entire supply chain provides interesting insights on who the long-term winners should be.
The conference was also an opportunity to get an update from a business we have owned for some time, Continental AG. It is an example of a quality business that not too long ago was trading at an excessively low valuation on depressed earnings. End markets remain challenging, however the substantial free cash flow generation has enabled Conti to refinance and pay down high cost debt, further driving shareholder value creation – we can also thank the bond market for being so generous. Conti is no longer the bargain it once was, but remains attractive and is a well- run company.
As always, Cambridge aims to find quality businesses trading at attractive valuations regardless of where they are domiciled. Europe is home to many excellent large and niche businesses – with an increasing number of them making into our funds. We are fortunate to have the flexibility to have open mandates, allowing us to focus only on finding the best risk/reward opportunities out there, as opposed to simply managing on a benchmark.