Free Cash Yield Review of 7 European name

Fiscal year results of some key European holdings are out and it is time to review these names with a particular focus on free cash flow yield

This post will review 7 key European name - 5 French 🇫🇷, 1 from UK 🇬🇧, 1 from Netherland 🇳🇱. Fiscal year results of these holdings are out and will review these names with a particular focus on free cash yield. In my opinion, consistent free cash flow yield is one of the best criteria to assess a company. As an investor, one must balance the benefit of owning a high free cash flow yield with a growing business. This is a tradeoff. Oftentimes a high growth company must reinvest all their cash flow to the business. This doesn’t necessarily make the best investment. The best business are able to grow business while generating a healthy free cash flow. As such, a steady grower, generating a healthy increasing free cash flow are often the best compounders.

The article constitutes my personal views and is for entertainment purposes only. The main goal of this article is to log my personal views. Nothing in this article or these posts in this blog should constitute an investment advice. The projections and estimates provided here should be considered as purely speculative. Do your own model and projections. Please refer to the disclaimer at the end of this article for more details.

For free cash flow yield, I am using operating cash flow less CAPEX over EV. I am thus subtracting net cash from the market cap or adding back long term debt to the denominator.

The following holdings are quality stocks not too cyclical which have grown steadily over the years. I have ranked them based on the latest (2024) free cash flow yield:

Not surprising, 2 French small cap (Thermador and Neurones) are ranked first in terms of free cash flow yields with a very high 10% and 9%. In third, Euronext has gone up recently, but still exhibit a very nice yield. Adyen is particularly cheap with a 4.37% yield for a high growth company - expected to grow 25% over the next few years. Rolls Royce and Safran, although operating in a duopoly in their respective market, are not that expansive. LVMH has come down significantly in price and is slightly undervalued in my opinion with a yields of 3.41%, significantly above the Euro rate. This table does show me that I need to invest more in Thermador, Neurones and Adyen (considering its growth profile).

Lets review them individually:

Les 🇫🇷 Françaises en premier: Neurones, Thermador, Safran, LVMH and Euronext.

Neurones 🇫🇷

A top quality French IT consulting firm with an impressive list of French customers.

Neurones has a very strong entrepreneur vibe as they often invest in spin off started by ambitious employees, so Neurones is actually a collection of multiple internally started enterprise - majority owned by the company with minority shareholding of founding employees. They have developed a very strong expertise in migration to cloud, cybersecurity and AI. They have invested heavily in building a secured private cloud for their customers with a SecNumCloud compliant solution.

the National Cybersecurity Agency of France (ANSII) has awarded the “SecNumCloud” qualification (granted to less than half a dozen service providers) to the cloud managed by the group's specialized subsidiary, thus recognizing it as a “sovereign cloud” or “trusted cloud”

The result for 2024 are strong, sales continue to grow at 10% clip, a bit of compression on margin back to historical level, as 2022 and 2023 were over historical norm of 10% margin. Cash keeps increasing at a healthy pace. Free cash flow was amazing in 2024, with free cash flow yield of 8.75%. If you exclude cash - PE was 16x earnings so in line with historical numbers.

Thermador 🇫🇷

Thermador published some very good free cash flow numbers in this downturn year. That’s the way to handle a downturn. Although sales was down 13% and operating income down 25%, Thermador was able to generate a healthy net cash balance reaching 38m in net cash (60m in cash less LT debt). The company is currently trading at free cash flow yields of 10.35%. THIS IS THE WAY a distributor should handle a downturn. The slowdown on the business has translated into a reduction in working capital requirements while keeping operating margin at a healthy level.

In contrast, Canadian distributor Richelieu Hardware did cut into inventory but saw its margin collapse significantly. Dannish Brødrene A & O Johansen is generating free cash flow much lower than its net income as working capital is increasing and CAPEX is very high. Both Richelieu and AOJ are trading at a much lower free cash yield of 5.4% and 3.4% respectively. Thermador is a much better deal and a better business.

Thermador is in advanced stage for 2 acquisitions, a French maker of fluid control device and a Spain distributor of fluid product distributing similar products than Thermador. I believe this will be a first foray in Spain. Those acquisitions combined should generate around 28m in Revenue or about 5% of current total sales.

2025 might see the stabilizing of the downturn and the end of the YoY drop in sales. Cash flow should be healthy enabling the company to make more bolt-on acquisition at attractive price.

Safran

Propulsion represents more than 70% of operating profit. The majority of the sales and income of the propulsion business comes from the contribution of CFM, a 50% consortium partnership between Safran and GE. CFM has developed the CFM56 and its new version the LEAP. This is the most popular commercial engine of the world. Today, the LEAP powers 100% of the Boeing 737 Max and about 50% of the Airbus 320 family of planes, including the Airbus 321 Neo.

The civil aftermarket represents 62% of revenue and has been on a healthy growth trend as seen below.

Safran is also the number 1 manufacturer of helicopter engine.

Stock has gone up recently based on very good numbers in the last few years. But at 3.11% yield, this premium is not so expensive.

Louis Vuitton Moët Hennessy

LVMH is the largest luxury brand company in the world. Fashion and leather represents about half of revenue and 75% of operating profit. This segment has been very robust in the last few years with sales being down only 2.6%. LVMH regroups also the leading Champagne and cognac brands with more than 50% market share in each market. This segment is more cyclical but exhibit wonderful margin in good times. In 2022, operating margin was 30% for the Wines and spirits division. The fashion and leather division exhibits even wider margin of 36% in 2024.

The stock currently trades (if you add LT debt) at a PE of 24, and a FCF yield of 3.41%. The company does need to invest in CAPEX (likely to expand on retail footprint) and working capital. So FCF is slight less than EPS.

Euronext

Euronext regroups the Stock Exchange of Paris, Amsterdam, Brussels, Lisbon Dublin and in 2021 Borsa Italiana. In the past few years, Euronext has internalized the clearing house business which originally was handled by a subsidiary of the London exchange. Now the clearing house of all 6 stock exchange is handled by Euronext. The clearing house capability was acquired as part of the Borsa Italiana acquisition. The integration of Borsa Italiana has gone well and EPS has grown steadily in recent years from 4.10 in 2022 to 5.63 in 2024. Stock Exchanges are great business and Euronext generates higher FCF per share than EPS. The stock currently trades at a healthy FCF yield of 4.72%.

Rolls Royce 🇬🇧

The Rolls Royce Pearl 15 exclusively equipping the Global 5500 and 6500 from Bombardier

Rolls Royce’s turnaround story continues. Margin expansion, dominance in the wide cabin engine market is fuelling some impressive numbers. 9B pound of revenue (of 17B) is commercial plane engine related of which 72% is the wide body engine market. They also have a nice product in the business jet business with the Rolls Royce Pearl. The Pearl is used by Bombardier Global 5500 and 6500 and some models of Gulfstream and Dassault (the Falcon10x is delayed to 2027). The service component (aftermarket engine maintenance) is more that 66% of the revenue so very stable. The story here is that as engine maintenance gets renewed with airlines, Rolls Royce is cranking up service rate to be more in line with GE rate (the large engine market is a duopoly).

The stock has run-up significantly over the last year, more than doubled.

Still, the free cash flow yield is very good for this type of business - entrenched duopoly in the wide cabin commercial engine plane. The company is now debt free and has started to pay dividend.

Adyen

I have written extensively about Adyen. Please check the Fintech tab in Wintergems.com, for more info on the company. The last 3 years results:

Adyen is the leading fintech company based in Amsterdam. A very unique culture for a high tech company. Not much dilution, Co-CEO gets a small remuneration, very shareholder friendly. 2024 saw Revenue growth and EPS growth at 24% and 32% respectively. Since the Company collects money from their merchants for a few days, its cash balance is increasing with the amount of processed payments. Currently stand at almost 10B Euros. The company earns finance income from this cash balance. For these reasons, FCF yields stand at 4.33%. This is a cash machine.

Disclaimer: The above article constitutes my or the authors’ personal views and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. I / The authors may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. The information provided in this article is not making promises, or guarantees regarding the accuracy of information supplied, nor that you guarantee for the completeness of the information here. The information in this article is opinion-based and that these opinions do not reflect the ideas, ideologies, or points of view of any organization the authors may be potentially affiliated with. The authors reserve the right to change the content of this blog or the above article. The performance represented is historical" and that "past performance is not a reliable indicator of future results and investors may not recover the full amount invested.