Are There Companies to Avoid Due toTheir Overexposure to Europe?

By Tom Cleveland, Forextraders.com   

The “European Debt Crisis” will go down in history as one of the longest lasting crises on record. It may surprise some, but it is the two-year anniversary of the first news stories that took note of a brewing deficit problem in Greece that soon gathered momentum and burst forth in all its glory the following May of 2010. Analysts scrambled back to their research desks searching for any information to guide the investment community, but financial statements rarely detail cash flows down to the country of origin.

Over the past year, questions have led to more insights on what the European malaise might portend for major corporate entities that derive a healthy portion of their profits from the region. We now have a better sense of revenue splits and operations on a regional basis, but even these facts may not be the best intelligence for picking winners and losers exposed to slowdowns across the Atlantic.

The European Union is our largest trading partner, accounting for over $600 billion in cross-border trade per year. Obvious sectors that would be impacted are the automobile industry, food, beverage and tobacco, and consumer apparel. The diagram below compares the share price behavior of leaders in these sectors with the plight of the Euro for the past twelve months:

The Euro, though ever changing, has retained its value over the course of the year, but the stocks depicted have endured more volatile swings in value with apparent correlation to the trends of the Euro for the period. Here are a few brief comments on each:

• Ford (“F”): U.S. carmakers derive 27% of their revenues from Europe. Ford has been hit hard by declining consumer spending in Europe, reporting operating losses on a quarterly basis from their local operations. Those losses and lower expectations for the near-term have battered their share price more than the other three companies highlighted.
  
• Abercrombie & Fitch (“ANF”): The consumer durables and apparel sector receives 16% of its revenue from Europe. ANF had been a high flyer, gaining investor support by closing a number of non-profitable stores during the year, but recent headlines have focused on their inability to turn the company around and reduce its exposure to problems in Europe. As a result, its shares have plummeted over the past month.
  
• Constellation Brands (“STZ”): Wine exports to Europe, a hefty 42% of all domestic wine sent abroad, may suffer, leading to reduced volume for Constellation Brands. Share prices have declined in unison with Ford, but not nearly as precipitously.
  
• Philip Morris (“PM”): Roughly 65% of the sales of this tobacco company come from Europe, but the problems in the region have only had a modest impact on share prices. Correlation with the Euro is evident, but the firm has prevailed, perhaps due to an abundance of tobacco sales in Russia.

Smaller companies have also been victims of stagnation on the European continent, most notably in the solar industry. Be careful before buying shares of First Solar and SunPower. As bad as the situation is at the moment and for the foreseeable future, there are a few companies that have fared well despite their presence in the Eurozone. Names like McDonald's, Kraft Foods, Sara Lee, and Oracle come to mind. Each company had impressive quarterly results, although the latter two have taken a few blows over the period.

Government officials in Europe recently reduced their growth expectations for 2011 down to 0.5% and stated their expectation for more sluggishness in 2012. Caution is the watchword for the medium term.

Tom Cleveland
Forextraders.com

 

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