By William Patalon III
And Mike Caggeso
When Deere & Co. yesterday (Wednesday) reported a, the agricultural-equipment maker said that a 5% sales slump in its North American market was more than offset by a 30% revenue gain in the company’s overseas markets.
The Moline, Ill.-based Deere (NYSE: DE) – known for its trademark green-and-yellow farm tractors and earthmoving machinery – reported worldwide net income of $537.2 million for the quarter ended July 31 – the highest total ever for that quarter in the company’s history.
“Deere’s efforts to grow a great business, particularly with the support of improving conditions across the global farm sector, are gaining strong momentum and producing powerful results,” said Robert W. Lane, Deere’s chairman and chief executive officer. “Advanced new products and services are helping expand the company’s market presence throughout the world."
It’s earnings season, and one very clear trend has emerged: Global gains trump domestic pains.
Profiting From a Global Focus
They peddle fast food, unite happy children with long-desired Barbie dolls or racy-looking Hot Wheels and Matchbox model cars, or enable consumers to satisfy a “jones” with an icy-cold Coca-Cola or zesty stick of gum. At a time when the U.S. economy is under attack on four fronts – taking direct hits from high energy prices, a weak dollar, a housing slump that’s crimping consumer confidence and a credit crunch that’s threatening to destabilize parts of the world financial system – the U.S. companies that are continuing to show healthy growth are those that can boast of major businesses abroad. And with long-term global growth trends expected to persist for years – if not decades – to come, investors seeking U.S. stocks should give first consideration to globally diversified firms, as opposed to companies that are focused solely on U.S. markets.
The best performers among the recent spate of corporate earnings reports only serve to punctuate this point. The companies that have honed a nice international presence – either across the oceans or at least outside U.S. borders – are generally the firms that have turned in the best results.
Let’s take a look at a few of these global knights.
Consider, for instance, Yum! Brands (NYSE:YUM) — the former PepsiCo spinoff that now consists of KFC, Pizza Hut, Taco Bell, Long John Silver and A&W All-American Food Restaurants — posted second-quarter profit gain of 11.5%, and then raised its corporate profit target for all of 2007. Success overseas is the main fuel for this financial growth, Chairman and CEO David Novak said.
“This global growth will contribute to Yum! Brands’ seventh straight year of opening at least 1,000 new restaurants outside the U.S.,” Novak said in company’s quarterly report.
With the recent product recall issues, global toy giant Mattel Inc. (NYSE:MAT) is right now mired in controversy, and even seems to have lost its way. But just weeks ago, the company that controls such powerful global brands as Barbie, Hot Wheels, Matchbox, Tyco R/C vehicles and more managed to post a bigger-than-expected 13% gain in second-quarter profits. And that was in spite of a 3% drop in U.S. sales.
“While the first half is not particularly significant to the highly seasonal toy industry, our positive results continue to reflect the benefits of our diversified portfolio of global brands,” Mattel Chairman and CEO Robert A. Eckert said of the company’s quarterly financial report.
And when the company bounces back from its problems, its global reach will help fuel the rebound.
For companies such as Mattel, the power of its brands is enough to boost sales in such far-flung markets as Asia, Eastern Europe and Latin America. Aspiring consumers in those regions have known about these particular U.S. products for years – or even decades – but in many cases had yet to actually see one up close. And they’d never before had the chance to buy any of these brands.
The worldwide reach and barrier-toppling power of both the Internet and satellite TV has changed all that. Consumers have for years been able to see what American consumers have. Now that incomes are rising, they can afford to have these goods imported. And U.S. companies are benefiting.
The shrewdest, and most-aggressive U.S. firms are even re-shaping their product portfolios to appeal to cultural and local consumer tastes. Take the Wm.Wrigley Jr. Co. (NYSE:WWY), the global maker of chewing gum, mints, candy and other confectionary products.
Wrigley has long been a global company: It gets 33% of its sales from its home market here in the United States, 45% from the “EMEAI” region (company-speak for the Europe, the Middle East, Africa and India), and 17% from Asia, and the remaining 5% from its other markets around the world.
The reason this is key: In the U.S. market last year, a tepid 4% increase in sales volumes led to an even-more-moribund 3% addition to net sales. In its EMEAI region, however, a healthy 14% jump in sales volumes caused net sales to soar 27%. And in Asia, a 21% improvement in sales volumes translated into an even-better increase in net sales of 23%.
But these global gains didn’t just “happen” – they were the result of conscious and methodical moves made by the company, which developed new products and refocused existing offerings to help make the company more competitive in key overseas markets. In China, for instance, Wrigley infused its traditional products with traditional Chinese medicine to create alternative “flavors” — “beauty” gum, “cooling” gum and “relaxation” gum. The result: double-digit growth and runaway market dominance in that product category in China.
“That was some very creative marketing…very avant-garde,said ” Prof. Eugene H. Fram, the J. Warren McClure Marketing Research Professor for the Rochester Institute of Technology College of Business in Upstate New York. “It’s very good marketing in the sense that Wrigley very effectively worked within its segment and then carefully picked out its target. That Wrigley was able to find an opportunity within its segment to create a product that people would buy is a testament to the company’s shrewdness and creativity.”
Bill Perez, Wrigley’s president and CEO, said the company’s “focused investments in key geographies – in terms of product innovation and brand support – are producing excellent results. All major regions contributed to our growth in the quarter, particularly Europe and Asia.”
Some U.S. companies have been “going global” for years. Among the veterans of the international markets: The Coca-Cola Co. (NYSE: KO), which noted in its second-quarter earnings report that “key emerging markets—including China, Turkey, India, Brazil, South Africa, Eastern Europe and Southern Eurasia – all increased at double-digit rates” during the quarter.
Shrugging off the Real Estate Blues
But if you’re a U.S. corporation, global growth isn’t a cure-all for whatever ails you. For example, take Caterpillar Inc. (NYSE: CAT), the U.S. industrial stalwart known for its trademark yellow and black earthmoving equipment. Even though Cat said “continued strength outside North America offsets weakness in on-highway truck engines and North American construction,” it wasn’t enough to keep the Peoria, Ill.-based firm’s profits from plunging 21%.
First, it showed the trickle effect of the real estate plague, which has sacked many other industries — banking, storage, REITs, automobiles, home supply, furniture, property insurance, department stores, lumber, hardware and more. It doesn’t drag them all down equally, but it’s a burden all would love to shed.
And it again proved that international growth and development is crucial, especially companies that can’t fully sidestep some of the U.S. economy’s current ills.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.