U.S. companies with significant exposure to Europe will take a profit hit regardless of how the Eurozone debt crisis shakes out.
The financial strain of Europe's efforts to avert default among its troubled members - Portugal, Italy, Ireland, Greece and Spain (PIIGS) - has set the Eurozone on course for a recession even if its efforts succeed.
Yesterday (Thursday) the European Commission dropped its forecast for growth in the Eurozone to just 0.5% from its previous estimate of 1.8% in May. The commission blamed austerity measures, which were aimed at lowering budget deficits, but ended up eroding investment and consumer confidence.
"The probability of a more protracted period of stagnation is high," said Marco Buti, head of the commission's economics division. "And, given the unusually high uncertainty around key policy decisions, a deep and prolonged recession complemented by continued market turmoil cannot be excluded."
Falling consumer demand has already begun to affect the bottom lines of many U.S. companies that derive large portions of their revenue from the Eurozone bloc.
"In light of cutbacks in government spending, tax increases and waning business confidence, there already has been some [company] commentary on slipping appliances, bearings and heavy-duty trucks demand," Citigroup equities analyst Tobias Levkovich told MarketWatch. "In many respects, these early remarks are a worrisome sign."
For example, General Motors Co. (NYSE: GM) on Wednesday said the debt crisis would prevent it from breaking even in Europe this year. And Rockwell Automation Inc. (NYSE: ROK) on Tuesday warned of declining capital spending in Europe next year.
Although sales to Europe account for only 10% of revenue for the Standard & Poor's 500 as a group, several sectors have far more exposure to the Eurozone.
The auto sector derives 27.6% of its sales from Europe, followed by the food, beverage and tobacco sector at 22%, the materials sector at 19.8%, the consumer durables and apparel sector at 16.2% and capital goods at 16.4%.
"Europe is a major component to the U.S. economic engine and it is a concern," Howard Silverblatt, an analyst with S&P Indices, told MarketWatch. Silverblatt noted that while a European recession may not necessarily take down the U.S. economy, "it has an impact that will move stocks."
Here are five U.S. stocks that have significant exposure to Europe and leveraged balance sheets high - making them risky investments until Europe gets back on its feet:
Five Stocks to Avoid
- Ford Motor Company (NYSE: F): More than a quarter of Ford's sales, 28.5%, come from Europe, the Middle East and Africa (EMEA). Its debt-to-capital ratio is 94.1%. Ford has not seen its sales in Europe slowing yet, but said that dealers have been forced to lower prices to hit their targets. Ford had a 3.9% operating loss in Europe in the third quarter, up from 3.2% a year ago.
- E.I. du Pont de Nemours & Company(NYSE: DD): DuPont had 26% of its sales from EMEA in 2010, while its debt-to-capital ratio is 57.3%. The company reported that results for the third quarter in Europe were "a mixed bag." Bonus Sector Sibling: More than a third of Dow Chemical Company's (NYSE: DOW) sales, 34.4%, came from EMEA. Its debt-to-capital ratio is 52%.
- General Electric Company (NYSE: GE): GE did 27.2% of its business in EMEA last year, and its debt-to-capital ratio is 75.8%. The company has said it plans to expand its lending business in Europe next year, which could turn out to be poorly timed. Bonus Sector Sibling: Emerson Electric Company (NYSE: EMR): Emerson generates about 20% of its sales in Europe, and said it would devote all of its restructuring efforts to that part of its business. Its debt-to-capital ratio is 34%.
- News Corp. (Nasdaq: NWSA): NewsCorp derived 29.4% of its sales from EMEA in 2010, and its debt-to-capital ratio is 36.1%. NewsCorp's European business is already under pressure following losses resulting from its phone-hacking scandal. A deep recession will add to the company's woes.
- Philip Morris International Inc. (NYSE: PM): Philip Morris generates an astounding 64.9% of its revenue in EMEA, and its capital-to-debt ratio is a lofty 89.3%. The company reported a 3.5% decline in unit sales in Europe in its third quarter, so its business there is already suffering.
News and Related Story Links:
- Money Morning:
What I Learned From My Lunch with Vikram Pandit - Money Morning:
The One Country That Could Take Down the Eurozone - And It's Not Greece - Money Morning:
Too-Big-To-Save: Italy Totters on Debt Crisis Cliff - Money Morning:
Jim Rogers Says New Greece Deal Can't Save Europe - Money Morning:
Deutsche Bank AG (NYSE: DB) Will Be Crushed Under the Weight of Europe's Debt - Money Morning:
European Union Debt Crisis Stings France, Putting U.S. Banks at Risk - Money Morning:
Stalling German Economy Will Throw Gasoline on Eurozone Debt Fire - Money Morning:
Spain's Economic Crisis Shows the Eurozone Can't Escape its Debt Trap - The Wall Street Journal:
EU Could Face 'Deep, Prolonged Recession' - Reuters:
Analysis: Europe's debt crisis to shake corporate America - Forbes:
The Largest U.S. Companies With Big European Exposure
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.