Investors optimistic about French large caps

With the debt downgrade out of the way, is now the time to invest in French companies? French listed large caps trade on multiples that are only two-thirds of the biggest U.S. companies (PE of 12 in France versus 19 in the U.S. according to Bloomberg). This means they are cheap if you think the outlook will improve. Some investors obviously do since, in aggregate, demand to borrow French large caps is down 6% over the past quarter.

We highlight three companies featuring in our screens for major recent movements in securities lending flow: CGG Veritas (EPA:GA), Air France (EPA:AF) and European Aeronautic Defence And Space (EPA: EAD).

Seismic surveying firm CGG Veritas could be an interesting bellwether that investors are starting to see reasons to invest in French companies. Short interest is low (2%) and falling, having almost halved over the past year. Even more positively, the trend of institutional investors reducing their holdings has slowed and swung round with the last week seeing a 3.5% increase in shares in lending programs.

One can understand why this EUR 3 billion company was the subject of negative investor sentiment and shrinking share price last year. It has EUR 1.4bn of debt and relies upon oil and gas companies being in an expansive mood. When confidence is low, as it was in the second half of last year, this is an unappealing scenario. But the outlook has improved. The impetus for big oil to retain CGG Veritas to scour the earth’s floor for more resources is a high oil price and it helps that Saudi Arabia recently said USD 100 per barrel was their guide price. An easing of the political backlash against new drilling licenses (see recent news in Brazil) and capacity constraints at existing sites also drive demand for CGG Veritas’ services. Investors think it is too costly to squeeze any more pips from the age old places and invest accordingly.

Confidence is also being shown by the fixed income crowd. CGG Veritas pays an annual interest of between 6.5% and 9.5% on its (mainly 2015/16 year expiry) corporate bonds. Credit investors obviously think the company will have no problem repaying this debt and like the high annual income so much that they have raised their stake of these bonds in lending programs.

Air France

It is an altogether different story for France’s national airline. There has been some short covering from over 10% of shares on loan in November to 8% today. On the other hand, institutions have been aggressively selling their holdings from 40m shares a year ago 15m today. For contrarians out there, this means one can barely short sell any more shares and it is reasonably expensive for those borrowing Air France. As such, any semblance of better news and the price could snap higher driven by a short squeeze.

EADS

No discussion of short selling in France would be complete without reference to defense company, EADS. It is some time since the maker of Airbus was a highly shorted name. Three years ago over 8% of the shares were being borrowed but this fell to as low as 3% recently. This is in reaction to the strong performance of the shares which breached a five year high this week. So what explains the 6 million (0.8% of the company) share rise in demand to borrow this over the last couple of days? Perhaps it relates to the press speculation (Financial Times Deutschland) that Daimler are planning to sell their 7.5% stake to KfW, the German Government’s Development Bank. The bank facilitating this trade may well short sell some shares in case the price of EADS falls below the price Daimler are selling at. If this were true, it is evidence that this divestment is imminent.