Banking on it

Croesus/The Investor's View:While the Irish equity market was not alone in its retreat last week, it did fall by more than many other equity markets.

In fact the Irish market has struggled to keep pace with its European peers this year and it is now unchanged on the year compared with year-to-date gains of approximately 6 per cent for most European indices.

A substantial portion of the underperformance of the Irish market is due to sharp falls in the main banking stocks.

Negative investor sentiment towards these stocks would seem to be primarily due to the abrupt turnaround in the housing boom.

Both AIB and Bank of Ireland have fallen sharply from their February highs and have underperformed the European bank sector by between 10 per cent and 15 per cent.

All the Irish financials have either issued trading statements or financial results in recent months. While these statements acknowledged the emerging slowdown in the mortgage market, they were all upbeat regarding overall trading prospects.

Other business divisions of the banks continue to perform very well and stockbrokers are maintaining their forecasts of earnings growth above 10 per cent for the Irish banks over the next two years.

The relative underperformance of the Irish banks now leaves them looking cheap in a European context.

The table shows price earnings (p/e) ratios and dividend yields for a selection of European banks.

The respective P/Es of AIB (10.2) and Bank of Ireland (9.4) are at the lower end of the European range.

Interestingly, banking stocks in the other peripheral European economies, such as Portugal and Greece, exhibit higher P/Es than do the banks in the major economies such as Germany and Britain.

On dividend yield comparisons, the Irish banks also compare favourably, with Bank of Ireland's yield of 4.4 per cent looking particularly attractive.

Over the summer months, ongoing news emanating from the Irish housing market is likely to remain negative. In contrast economic news from most of the rest of the economy has been very good.

Partly on the back of SSIA funds, retail sales growth should continue strong over the remainder of this year. The manufacturing sector is having a particularly good 2007 so far and it would seem that strength in the European economy is feeding through to extra demand for Irish exports.

Therefore, the prospects for the overall Irish economy remain supportive of the banking industry.

Croesus believes that much of the housing-related bad news is reflected in current share prices. Current valuations are not compellingly cheap but, in the context of a healthy economy, banks are attractive investments at current levels.

C&C sharpens its market focus Drinks company C&C continues to sharpen its focus on to the growing thirst for cider. The disposal of its soft drinks business for €250 million further streamlines the group and cider will now account for approximately 90 per cent of sales and operating profits.

Cider is one of the fastest-growing drink brands in Britain and Ireland as evidenced by the 20 per cent growth in the British market in 2006. Building upon the successful launch of the Magners brand in the UK, C&C is now test marketing Spain and Germany as potential new premium cider markets.

C&C's €200 million capital investment in new facilities last year means that it has doubled its production capacity and is now well placed to supply the growing demand for its cider products.

The shares are priced for strong growth with an estimated 2008 prospective P/E of 17.5.

Essentially C&C has become a one-product company, but it is this lack of diversification that could potentially make it a very attractive take-over target for one of the major drinks companies.

To be attractive to a major player, C&C needs to develop its market share in Britain and establish a niche position in a number of continental European markets.

The key risks to its growth strategy are intensified competition in Britain and the danger that it will have to sharply increase its marketing spend in order to sustain rapid growth.

Croesus takes the view that the potential upside if the company gets it right is sufficiently attractive to outweigh these risks and the shares are well worth buying at current levels.