5 favorites for foreign exposure

by Isabelle Sender, S&P Capital IQ, The Outlook

There are a limited number of publicly traded companies that are based outside the U.S. and whose shares trade on a U.S. exchange, and even fewer that have S&P Capital IQ’s top rank.

As of September 14, there were just five companies whose American depositary shares (ADSs) held the top 5-STARS or “Strong Buy” recommendation.

Two of the foreign companies with shares trading in the U.S. are dividend-paying, commodity producers. PetroChina (PTR), the country’s largest oil and gas producer, is 87% owned by the Chinese government. It  recently had a dividend yield of about 3.7%.

S&P Capital IQ Equity Analyst Ahmad Halim says that while the company’s 5.6% decline in first half net profit was disappointing, “we believe that weak results are already priced into the shares.”

The shares are trading about 20% below their recent high in early May. Halim sees earnings per ADS rising by 5.5% for the full 2012 year, and by 13% in 2013.

London-based metals and mining concern Rio Tinto (RIO) recently paid a dividend yielding 3.5%. S&P Capital IQ Equity Analyst Johnson Imode sees earnings per share falling by 8% in 2012.

But he still recommends buying the shares because he sees Rio as better able to withstand the ups and downs of commodity prices than its major competitors.

Both Rio and PetroChina recently traded at less than 11-times trailing earnings and operate in industries for which the 12-month outlook is positive.

The three other ADSs that do not pay a dividend are considered by S&P Capital IQ analysts to be undervalued leaders in growth areas.

Baidu (BIDU) is the leading search provider in China, and S&P Capital IQ EquityAnalyst Scott Kessler sees revenue growing by 59% in 2012 and 44% in 2013. Kessler has a $180 12-month price target for Baidu shares.

“Baidu is the clear leader in the Chinese search segment, and we think it has notably improved its related offerings and efficiency,” Kessler says.

S&P Capital IQ’s fundamental 12-month outlook for Internet software and services companies is positive, as more advertising dollars flow to Internet sites compared with traditional media outlets and a stronger pricing environment, Kessler says.

ICON PLC (ICLR) is a contract research organization providing clinical research and development services to pharmaceutical and biotechnology companies.

S&P Capital IQ Equity Analyst Jeffrey Loo has a positive fundamental outlook for the life sciences, tools, and services group. “In our view, life science sales growth will be driven by new products and the need for drug firms to advance their pipelines, particularly due to the pharmaceutical patent cliff.

Emerging markets such as Brazil, India, and China remain robust growth regions and are growing at double- digit rates, helping to fuel overall industry growth.”

ICON is benefitting from a May, 2011 agreement announced with Pfizer as a strategic partner for research and development. While ICON’s profits suffered after it hired 1,000 new employees to handle the business, Loo sees profit margins widening in the future.

Israel-based NICE Systems (NICE) is a leading provider of solutions capturing, managing, and analyzing multi- media content, including calls to contact centers and back offices, video captured on closed-circuit television cameras, radio communications, e- mail and instant messaging.

Although NICE operates in an industry for which S&P Capital IQ has a neutral fundamental outlook over the next 12 months, Todd Rosenbluth, S&P Capital IQ equity analyst, believes NICE is less exposed than peers to IT-spending weakness.

“We think it is aided by catering to regulation, security and customer service requirements, areas that need to be addressed even in a tougher economy,” he says.

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