6 top-ranked buys for international exposure
Among ADRs, these stocks are the only ones to earn this rating from S&P Capital IQ.
By Beth Piskora, S&P Capital IQ, The Outlook
The S&P Capital IQ Investment Policy Committee recommends maintaining a portfolio diversified across asset classes and geographies. One way to accomplish the goal of having international equity exposure may be to invest in S&P Capital IQ's top-ranked foreign companies trading in the U.S.
Six companies with American depositary receipts (ADRs) garner our top 5-STARS buy rating, suggesting the likelihood of significant outperformance in the next 12 months.
Rio Tinto (RIO)
Rio Tinto is one of the world's largest mining companies, with headquarters in London. Its top two markets, in terms of total revenues, are China and North America.
The shares underperformed in 2012, in our view, due to fears over China's slowing growth and, in turn, its demand for iron ore.
We believe these fears are overdone, and given limited supply growth seen for this commodity until 2014, our expectations are for slower but robust Chinese demand growth (3%-5% a year).
We believe these points support a rebound in iron ore prices in 2013, but, on our estimates, the market is discounting prices that are closer to the lows seen in September ($100/ton), by our analysis.
Overall, we expect profits to remain historically high in 2013, but we think this is not appropriately reflected in the valuation of the ADRs.
Baidu is the clear leader in the Chinese online search segment, and we think it has notably improved its related offerings and efficiency. The company has recently gained market share, especially given uncertainties about Google's offerings in China.
We also see significant potential in adjacent areas such as contextual and display advertising, and certain types of search-related or search-driven content and communications.
CNOOC is China's largest offshore producer of crude oil and natural gas. S&P Capital IQ believes the energy company has a solid business profile, a strong balance sheet, and good underlying fundamentals.
In July 2012, CNOOC announced a deal to acquire Canadian exploration & production (E&P) company Nexen for $15.1 billion.
We estimate the deal value at about $20/barrel of oil equivalent (boe), which is about 90% above CNOOC's other recent deals, but warranted, in our view, by lower regulatory risk and by the control premium. We see it as a positive for CNOOC, given greater access to technology and a boost to reserves and production.
China Unicom (CHU)
China Unicom provides both wireless and wireline telecommunication services in China. We estimate revenue growth of 12% in 2013, following 19% growth in 2012, in local currency.
In the first quarter of 2013, CHU's third-generation (3G) wireless subscribers grew 80% from the prior year, to 88 million, and are now 35% of total subscribers. Mobile average revenue per user increased 0.6%, as 3G broadband data growth offset voice declines.
In wireline, broadband subscribers grew 14%, but access lines declined 1%. We see mobile data driving revenue growth, but declining voice revenues dampening the company's overall growth rate.
One more company to make the cut is Ireland's Icon, a health care services company that provides clinical research and development services.
We believe the company's selection by Pfizer (PFE) as one of two preferred providers highlights the company's breadth and depth of services, as well as its global reach. We also believe the company is well positioned to gain market share from smaller competitors.
We like Ericsson's market share in mobile infrastructure, and see a strong patent portfolio and growing software business.
We expect 2013 sales growth to accelerate and see a mix shift towards more higher-margin capacity projects, which should drive higher gross margins through 2014.
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