Daily commentary: Inditex is a Spanish retail stock worth watching

By Edward Harrison On Jun 13, 2012

Daily commentary

Despite the terrible headlines coming out of Spain, for investors there are two silver linings in Spanish equities. First, European shares have been battered by the euro zone crisis and trade at a considerable discount to US shares. Europe presents better value. For this reason, I said in January that I expected European shares to outperform US shares in 2012. Moreover, this discount does not represent a value trap. Inditex, the Spanish retailer I linked to a few days ago, which owns the Zara brand is a perfect example.

Inditex, based in La Coruña, became Spain’s biggest listed company this week. Founder Amancio Ortega, the fifth richest man in the world, still controls 59% of the company. Ortega is the son of a railway worker who left school at 14 but used his life savings in 1963 to set up Confecciones Goa, an enterprise which morphed into Inditex. Zara is the most known brand at Inditex. The first shop opened in La Coruña in 1975 but in the last decade the company has expanded internationally.

Earnings were released today and they were good. Due to expansion in emerging markets, Inditex racked up a 30% increase in profits. It’s 432 million euro quarterly profit was well over analyst estimates.

Many of Spain’s largest companies are well-diversified, from Telefonica to Repsol to even banking giants like BBVA and Santander. In my view, these are quality companies negatively impacted by the headlines on Spain. For value investors this represents opportunities. Yields are upwards of 5%.

That’s it. Here are the links.

Link commentary

Going forward I will try to say a few words about the links themselves rather than just focussing on one topic especially because some of the links are in foreign languages.

Here are some threads to pick up on:

The Jamie Dimon hearings are going to be the biggest news item in the US as Dimon’s performance will shape the public’s opinion about any need to rein in risk taking at big banks. I have four links on this topic below.
In Europe, it is clear that the Spanish bailout will not meet the grade. Moreover, as Europe sinks further into recession, Italy will not be able to counter the tug downward from the rest of the periphery. The ECB will have to buy Spanish and Italian debt or set a rate target at which it is prepared to buy. Otherwise, this crisis will unravel via bank deposit flight and economic collapse. This is a stark warning that stands in contrast to my optimism about European shares. But my thinking on European shares is on a relative value basis. In absolute return terms, exposure to shares need to be hedged by government debt in countries like the US, Britain or Canada without the problems of the euro zone.
In the US, Obama’s re-election bid is very dependent on the economy. And he has to be worried. The economic trends are moving against him as I suspected they would. And there is no fiscal or monetary stimulus in the pipeline to bail the US economy out. In my view, given the household debt problems, the only source of positives here could be capital spending and fixed investment, especially in housing. I am not bullish on the US economy though.

Chart of the day: Median net worth, 1962-2010 | Felix Salmon

Five Questions for Jamie Dimon – Bloomberg

Answer to Apple Inc.: How does Apple keep secrets so well? – Quora

Obama’s White Base Shows Cracks Compared With 2008

Japan Machinery Orders Jump – WSJ.com

U.K. industrial production posts 14th monthly fall – MarketWatch

Schuldenkrise: Barroso: Bankenunion auch ohne Vertragsänderung – Wirtschaft – FAZ

BBC News – Eurozone industrial production falls in April

China government adviser predicts second-quarter growth below 7 percent | Reuters

OECD says governments need to raise retirement age. – latimes.com

Österreich kommt billig an frisches Geld – Bundesfinanzierungsagentur – derStandard.at › Wirtschaft

Zapatero: "España tiene el sistema financiero más sólido de la comunidad internacional" – ABC.es