The European financial crisis really took a toll on European stocks. The debt crisis that came from Portugal, Italy, Ireland and Spain caused investors to pull money out of European equities and banks, throwing nearly the entire Continent into a recession.

#-ad_banner-#In the flight to safety, investors ended up investing a large portion of their portfolios in U.S. bonds and equities. The U.S. was pretty much the only game in town. But, now as U.S. markets make new highs, investors are starting to grow cautious with U.S. equities — and looking elsewhere. 

Europe is back on investors’ radars. All major European countries are now out of recession. A major contributor to this is the continent’s manufacturing sector, which has been driving growth in the region. Many of these European manufacturers are still in deep value territory and cheaper than their peers across the pond.

One investor who has noticed this is billionaire Daniel Loeb, who runs the hedge fund Third Point. His latest pick is Koninklijke DSM (OTC: RDSMY), better known as Royal DSM.

Like many European companies, Royal DSM has been around for a long time. It was founded in 1903. But over the past three years, the Dutch company has transformed itself into a leading global life sciences company. Last year, the company had over $12 billion in sales — yet it sports a market cap of only $12 billion. 

Royal DSM has five different divisions — nutrition, pharmaceuticals, performance materials, polymer intermediates and new innovations. Its nutrition segment is one of the world’s largest manufacturers of vitamins, its performance materials unit is a leading supplier to the construction and automobile industries, and the new innovations segment focuses on biomedical, biofuels and the solar industry.

Despite a nice run over the past five years, shares of Royal DSM are essentially flat over the past 12 months:

Loeb sees Royal DSM as trading at a 40% discount below to its major peers. With his history of prodding management to boost shareholder value, look for Loeb to push Royal DSM to implement changes that will ultimately get shares high. 

In a recent letter to investors, Loeb said his firm is looking forward to “DSM management’s future efforts to unlock shareholder value via portfolio streamlining.”

One segment that Loeb wants Royal DSM to get rid of is its commodity caprolactam business (caprolactam is a common ingredient in nylon). Loeb wants to see this division either sold or spun off into a separate company. Doing so will likely boost shareholder value.

The other problem that Loeb sees is that the sheer number of Royal DSM’s divisions is masking the company’s true value. For instance, nutritional supplements are one of the fastest-growing segments in today’s marketplace — but the slower growth of the performance materials and polymer segments are weighing down Royal DSM’s overall valuation. 

In other words, if Royal DSM were broken up, according to Loeb’s thesis, its value would be much higher than where it is trading at today.

Royal DSM has done a solid job of expanding into emerging markets. Last year, 39% of its revenues came from Brazil, Russia, India and China (the so-called BRIC nations). The company expects these countries to account for 45% of total revenue next year. 

Of these markets, China is the most critical, accounting for about 12.5% of its business last year. Royal DSM expects its revenue from the region to grow from $1.7 billion last year to $3 billion next year. Most of this growth will come from the company’s recent acquisition of Aland, which is one of the leading manufacturers of vitamin C tablets in China. 

As you might expect based on Loeb’s argument, shares of Royal DSM appear to be quite undervalued compared to its peers. Shares are trading at just 1 times sales and 1.5 times book, well below the industry averages of 1.7 times sales and 4.4 times book.

Risks to Consider: While Royal DSM has diversified into emerging markets, the company is still heavily tied to the European auto and construction markets through its performance materials division. Europe’s recovery remains fragile, and a contraction would have an impact on Royal DSM’s top and bottom lines.

Action to Take –> Daniel Loeb sees shares as being undervalued by 40%. Buy shares of Royal DSM with a price target of $25, representing upside of 42% and bringing it in line with its fair value according to Loeb’s thesis.

RDSMY doesn’t yet pay a dividend, but that doesn’t mean every company based outside the U.S. is a risky growth stock. In fact, if you’re ignoring overseas markets, then you could be missing out on some of the market’s biggest income opportunities. All told, we’ve found 93 companies paying 12%-plus yields — and nearly a thousand more paying above 6%. Click here to learn more.