8 big US companies at risk in Europe
The continent's financial woes may sometimes seem far away from your portfolio. But they could hurt the stocks you own -- including widely held names like Ford, Coke, McDonald’s, GE and more.
By Agustino Fontevecchia for Forbes.com
As the sovereign debt crisis in Europe roars on, investors in U.S. companies should keep an eye out for potentially dangerous sales exposure to the Old Continent, which, under tighter fiscal regimes and slower growth, could affect bottom lines and stock prices.
With about 10% of S&P 500 sales coming from Europe, even deeply cyclical industries and defensive groups could take a big hit, according to Citi's equity research team.
Global markets have been on a European rollercoaster lately, reacting to every headline out of the old continent. From Greek PM George Papandreou’s call for a referendum to Italian PM Berlusconi being forced to resign, the European sovereign debt crisis has kept investors on the edge of their seats.
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While the situation remains fluid, it is clear that European economic growth has slowed and could possibly already have turned negative, as Goldman Sachs' chief economist Jan Hatzius believes. Regardless, a slowing European economy will affect U.S. companies with substantial sales exposure to the Old Continent, and investors would do well to recognize these risks and adapt their portfolios correspondingly.
Citi’s research suggests that a few deeply cyclical sectors could take a big hit from a European slowdown. Within the S&P 500, companies in the materials industry derive 19.8% of their sales from Europe, the Middle East, and Africa (EMEA). DuPont (DD), for example saw 26% of its 2010 sales coming from EMEA, while Dow Chemicals’ (DOW) share of EMEA revenues as a percentage of total revenue hit 34.4%.
The auto sector was another cyclical industry with substantial exposure, with 27.6% of its sales in Europe. Ford (F) stands out among the group, with EMEA revenue making up 28.5% of its 2010 sales. Other exposed sectors include consumer durables & apparel with 16.2% of sales in EMEA, consumer services (16.7%), and capital goods (16.4%).
Citi’s analysts warn that even typically defensive sectors, generally good for parking capital in times of market stress, exhibit substantial exposure to Europe. The food, beverage & tobacco group is particularly at risk, with 22% of its sales in EMEA.
McDonald's (MCD), for example, derives 39.78% of revenues from EMEA while Philip Morris (MO) posted a massive 64.9% of its sales in the Old Continent. Coca Cola (KO), another major large cap, took 22.2% of its revenues from EMEA.
One good way for investors to shield their portfolios from European risk is to set up a filter for large sales exposure and leveraged balance sheets, Citi’s research team shows. NewsCorp (NWS), with 29.4% of revenues coming from EMEA and a 36% debt-to-capital ratio, and General Electric (GE) (27.2% and 75.8%) stand out among that list.
While Citi’s analysts warn that such a list doesn’t necessarily reflect actual earnings risk for these companies (as it is compiled using publicly disclosed information and analyst input), they warn that European risk might not be fully priced into many of these stocks. They suggest keeping an eye on exposures, balance sheet strength, and the value of the euro, which could have a big impact on sales.
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