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The second-quarter earnings season has delivered some healthy activity, but the true standouts are the big U.S. companies that have learned to profit from emerging markets.
These are what Money Morning Chief Investment Strategist Keith Fitz-Gerald refers to as "glocal" companies – firms that have a global and local presence. And they offer investors a way to profit from emerging-market growth, while also safeguarding against turbulence at home.
Indeed, as U.S. debt issues continue to weaken the U.S. dollar, "glocal" companies are profiting from increased exports, selling to markets like China and India and their growing middle class.
So, let's look at some of the most promising prospects.
Earnings Season Shows Boost in Profit from Emerging Markets
So far this season, earnings at companies in the Standard & Poor's 500 Index are the highest they've been in four years, according to S&P analyst Howard Silverblatt. About 75% of companies that have reported have exceeded analysts' expectations, and many raised earnings' forecasts for the rest of the year.
Earnings per share are up 19% from a year earlier for the 122 S&P companies that reported earnings as of July 22. And much of the increase is from companies with strong exposure to emerging markets.
McDonald's Corp. (NYSE: MCD), which gets about two-thirds of its revenue from overseas sales, reported that second-quarter earnings increased 15% to $1.4 billion. The company said overseas sales growth outperformed U.S. growth in the April-June quarter.
General Electric Co.'s (NYSE: GE) second-quarter revenue jumped 21% to $3.8 billion, with a big boost from its operations in emerging markets. GE saw U.S. revenue from its core industrial businesses decrease by about 3.4%, while international industrial revenue climbed by 23%, accounting for about 59% of GE's total industrial revenue.
GE's Chief Financial Officer Keith Sherin said the company saw slow growth in the United States, but its international divisions enjoyed double-digit revenue growth last quarter, including a 91% jump in India and a 35% increase in China.
The growth helped GE get a record order backlog of $189 billion.
Air Products & Chemicals Inc. (NYSE: APD) expects to split profits this year between the Americas and Asia, but Chief Executive Officer Paul Huck said that split is starting to shift.
"We think that that number starts to tilt more toward Asia going forward," Huck told investors on a conference call last Friday.
Honeywell International Inc. (NYSE: HON) Chief Financial Officer David Anderson said high U.S. unemployment and sovereign debt concerns across the globe have made companies reevaluate their operations to profit from emerging markets.
Anderson said U.S. and European economic problems have led to a "muted or grinding subpar recovery."
"As a result, there is a need for both caution and flexibility in terms of your operating mind-set," he said.
Foreign demand – especially from China – also helped boost Caterpillar Inc.'s (NYSE: CAT) second-quarter profit by 44%. About 90% of Caterpillar's U.S.-made large mining trucks are exported. Sales were up 34% in Latin America and 41% in the Asian-Pacific region.
Getting in on Glocal Companies
One of the major offshoots of this global growth has been increased hiring abroad.
Indeed, many global companies are moving more and more of their operations overseas, focusing their hiring efforts on markets that have performed better than the United States. With a weak U.S. dollar, foreign sales are likely to continue outperforming those at home, meaning jobs are unlikely to return quickly.
"Any U.S. multinational corporation is going to benefit from a weaker dollar," Michael Yoshikami, chief executive at fund management firm YCMNET Advisors, told Reuters earlier this year. "The problem is that on a fundamental basis, there isn't a real driver for massive re-employment."
According to the U.S. Commerce Department, U.S. multinational corporations cut their domestic workforces by 2.9 million during the 2000s, and increased overseas workforces by 2.4 million.
Now that companies have increased efficiency in the United States, they've enjoyed better earnings and have little incentive to hire at home.
"We've driven all this cost out. Sales have come back, but people have not," said Greg Hayes, chief financial officer at United Technologies Corp. (NYSE: UTX). "It's the structural cost reductions that we have done over the past few years that have allowed us to see strong bottom-line results."
While many Americans criticize companies that take U.S. jobs overseas, you as investors can profit from the global shift.
"It doesn't take more than a quick glance to see that the capital flowing out of the United States and into other countries has been very beneficial for a lot of corporations," said Money Morning Contributing Editor Shah Gilani. "Those are the corporations whose shares you should be buying."
In addition to the U.S. multinationals listed above, another U.S.-based company expected to profit from increased overseas sales is Wal-Mart Stores Inc. (NYSE: WMT). Wal-Mart has successfully introduced its "everyday low prices" strategy to markets in Japan and Mexico, and is now moving on to markets like Brazil and Honduras.
The company credits the low-price approach to increasing international growth by 11.5% in the first quarter.
"The emergence of the middle class in countries like Brazil and China are such powerful drivers for Wal-Mart," Sarah Henry of Manulife Asset Management, which owns Wal-Mart shares among its $217 billion in assets under management, told MarketWatch.
Wal-Mart recently got approval to merge with South African retailer Massmart.
"We'll grow much more," Wal-Mart Chief Executive Mike Duke told MarketWatch. "There are many more growth opportunities in each country. South Africa is a great example. That can be the beginning of something great."
Money Morning's Keith Fitz-Gerald said exposure to Wal-Mart is good long-term because of the company's diversified revenue stream and multiple-product lines.
Wal-Mart will report second-quarter earnings in August.
Fitz-Gerald also alerted readers to another stock pick profiting from international cash flows, even as U.S. markets stagnate. To find out one of the best ways to profit from emerging markets, you can sign up for our affiliate newsletter, the Money Map Report.
News and Related Story Links:
- The Wall Street Journal:
Business Abroad Drives U.S. Profits
Wal-Mart pitches ‘everyday low prices' overseas