As music lovers flock to Vienna for the yearlong celebration of Mozart's 250th birthday, investors in Austrian stocks are singing a happy aria.
For the 12 months through May 18, the MSCI-Austrian index rose more than 44 percent in euro terms and more than 46 percent in dollar terms. Over the past three years, Austrian shares have generated annualized total returns of 50 percent in euros.
Indeed, some say this diminutive market, whose $120 billion in market capitalization is half that of Microsoft's, may be overheating. The 21 companies on the Vienna Stock Exchange's Austrian traded index -- mainly energy, banking and industrial corporations -- sell at an average price-earnings ratio of 18.1, well above British, German and French stock valuations, according to Thomson Corp.'s Datastream. Others say the rally has legs.
Austrian companies have received a huge boost from their proximity to one of the world's fastest-growing regions: Central and Eastern Europe. (Austria is bordered to the north by the Czech Republic, to the West by Germany and Switzerland, to the east by Slovakia and Hungary and to the south by Slovenia and Italy.) Convenient access to the region's burgeoning markets partly explains why companies in the ATX index have appreciated so dramatically.
Nils Francke, who co-manages the $276 million Forward International Small Companies Fund offered by Forward Funds, a San Franciscobased money manager owned by Swiss private bank Pictet & Cie, generally keeps more than 5 percent of his portfolio's assets in Austria. By comparison, the MSCI Europe Australasia and Far East index weights Austria at 0.50 percent and the MSCI Europe index at 0.75 percent. Says Francke, "In Austria we're seeing the alignment of ideal market conditions: privatization and increasing public float; mergers; responsible corporate management coupled with increasing shareholder focus; and access to fast-growing markets to the east." Those combined forces have helped ATX companies deliver an average earnings growth rate of 50 percent a year over the past three years.
The merger boom is two-pronged, as Western firms buy into Austria and Austrian firms buy into Central and Eastern Europe. For example, in November 2005, Italian bank UniCredit purchased BankAustria Creditanstalt for $3.27 billion. In March, Austrian oil giant OMV purchased a 34 percent stake in Turkish oil company Petrol Ofisi for $1.05 billion.
Investors also applaud the increasing free float of formerly private- and government-owned Austrian businesses. In mid-May the government announced that it would sell off a 49 percent stake in Österreichische Post, the country's postal service; the offering is expected to raise about $830 million.
It's no surprise, then, that one of the oldest pure Austrian funds, Vienna-based Raiffeisen Capital Management's E125 million ($158 million) Raiffeisen Austrian Equities fund, has been booming. For the 12 months ended April 30, it returned 52 percent in euro terms. Over three years the portfolio has returned an annualized 42.7 percent.
Raiffeisen fund manager Mark Kerekes is especially keen on one particular small-cap stock, Austria Technologie & Systemtechnik. Having gone public in 1999 on Germany's Neuer Markt, AT&S is now a global leader in manufacturing printed circuit boards for handheld computer devices that serve the medical and automotive industries. Kerekes expects AT&S to increase its current 13.5 percent share of this $45 billion market over the next several years to at least 20 percent. Among the company's achievements: It's the sole supplier for Research in Motion, the maker of BlackBerry devices. Annual revenue growth over the three years through 2005 has averaged 10.8 percent, while profits have soared an annualized 54 percent.
Kerekes began to establish his position in AT&S, which recently represented 4.8 percent of his fund's assets, in July 2005, at an average price of E15.28. By May 12, the stock was up more than 10 percent.
European equity fund managers who have overweighted Austria have reaped handsome rewards, and some are taking some chips off the table.
"Over the past five years," observes Thomas Bichler, equity analyst at Vienna-based Raiffeisen Zentralbank, "the portion of revenue generated by ATX-listed companies from Central and Eastern Europe has climbed from 10 to 30 percent. Because of this increasing link in their fortunes, Austrian shares could be hurt not only if Central and Eastern European countries stumble, but from contagious fallout from any blowups in emerging markets across Southeast Asia or Latin America."
Michael Sieghart, who manages the Frankfurt, Germanybased E492 million DWS Invest European Equities fund, kept as much as 15 percent of the portfolio in Austria during the middle of last year. Toward the end of 2005, he pared back his Austrian exposure by half -- strictly on valuation grounds, he says. His 12-month total return, in euros, through April, is 50.1 percent. His three-year annualized return: 24.5 percent.
As of May 12, Sieghart's biggest holding was in Austria's largest life insurer, Wiener Städtische Versicherung, representing 3.7 percent of his portfolio. The Vienna-based insurer has focused on the expanding markets of Central and Eastern Europe, where the firm now generates 30 percent of its premiums, up from zero five years ago. As a result, over the past three years, Wiener has increased annualized revenue growth rates from 8 to 10 percent to 12 to 15 percent. Annual earnings growth over the past three years has averaged 22 percent.
Seighart started buying Wiener shares in November 2004; his average cost is E34.50. As of the middle of last month, Wiener shares were trading at E52.65. The portfolio manager expects further gains given the fragmented insurance markets in Central and Eastern Europe.
In January 2006 the fund sold its stake, representing 2 percent of its assets, in OMV. The shares had soared from E43.30 in July 2005 to E60 in just six months. "This is a very sound, well-managed company that's making smart acquisitions across the region, most recently in Romania and Turkey," observes Sieghart.
But representing a whopping 20 percent of the ATX's market cap and attracting attention as the region's major oil play, the stock had gotten ahead of itself, he says. Since he sold his stake, OMV shares have pulled back 10 percent, to E56.25, as of May 12. If it hits E50, Sieghart would consider reestablishing a position.
Francke's Forward International Small Companies Fund returned 44.2 percent for the 12 months ended May 18, 2006. Over three years it's up an annualized 38.5 percent.
Francke likes Austrian industrials. He's especially bullish on Graz-based Andritz Group, one of the world's biggest manufacturers of paper mills. He established an initial position on January 9, 2004, at E45. Continuous investment in the stock has pushed up his average cost to E96.63, with the stock representing 1.07 percent of total assets. It traded recently at E144.97.
The company has benefited from the paper industry's revival, which has boosted demand for new mills, sparking annual revenue growth at Andritz of 15 percent over the past three years. Steadily improving margins, reflecting pricing strength and more efficient distribution, has helped produce average annual earnings growth of more than 42 percent over the past three years. Francke thinks the stock could rise 20 percent over the next 12 months.
The portfolio manager also likes Böhler-Udderholm, a Vienna-based specialty steel manufacturer of high-performance metals for the aerospace, automotive and electronic industries. He began amassing his stake in B-U in June 2005; his average cost is E139.63. In mid-May the stock was trading at E194.25.
With earnings up an annualized 57 percent over the past three years and the stock trading at a projected 2006 P/E of about 9, Francke thinks B-U is significantly undervalued. "The company enjoys strong demand across all its divisions, it recently made two strategic acquisitions that should improve market share and margins, and it pays a dividend of more than 4 percent," he says. "I see a 15 percent upside over the next year."
Like other stocks on the Vienna bourse, B-U has benefited from a link to Central and Eastern Europe. Of course, that could quickly change if economic growth in these countries slows. But Raiffeisen Zentralbank analyst Bichler, among other optimists, sees no near-term threat. "Austrian stocks have plenty of room to grow," he says.
