For all the anxiety about Europe’s sovereign debt crisis, U.S. companies depend on the region for a shrinking portion of sales.
Europe accounts for about 21 percent of Standard & Poor’s 500 Index revenue, according to data compiled by Bloomberg from 185 companies that disclose results for the region. That’s down from 23 percent in 2008. The companies posted a 10 percent drop in their European sales during that period, the data show.
Concern that Greece will default and trigger another global financial crisis has curbed the S&P 500 this year, leaving the index with a 1.9 percent loss since reaching its 2011 peak of 1,363.61 on April 29. Financial reports show companies from Coca-Cola Co. and Intel Corp. to Whirlpool Corp. may be shielded as sales in the U.S. and emerging markets grow.
“There’s enough good news out there that we think U.S. equities are going to overcome Europe,” David Goerz, the San Francisco-based chief investment officer at HighMark Capital Management Inc., said in a telephone interview on July 20.
“What we do see is that there’s still tremendous opportunities for U.S. companies,” said Goerz, whose firm manages $17.2 billion. “Companies seem very focused on the bottom line, and they continue to produce very high profit margins that just aren’t dissipating.”
Greek public debt that ballooned to 1.43 times gross domestic product has contaminated Europe’s financial markets and sent government bond yields in Italy and Spain to records last week before leaders announced measures to keep the crisis from spreading. The euro gained 1.4 percent to $1.4360 last week.
At Intel in Santa Clara, California, and Benton Harbor, Michigan-based Whirlpool, reliance on Europe is shrinking as Latin America and Asia become bigger sources of sales.
The S&P 500 rose 2.2 percent to 1,345.02 last week after companies from Apple Inc. to Morgan Stanley and Advanced Micro Devices Inc. topped analysts’ profit estimates and Europe pledged support for Greece to end the region’s debt crisis.
The index retreated 0.6 percent to 1,337.43 today as a political stalemate over raising the U.S. government’s debt ceiling intensified, spurring concern the nation will default.
For the 128 S&P 500 companies that have posted quarterly results since July 11, earnings climbed an average of 19 percent, data compiled by Bloomberg show. Between July 20 and July 22, analysts boosted estimates for S&P 500 profit during the final three months of 2011 by 2.3 percent, data compiled by Bloomberg show. That’s the biggest two-day increase for the quarter after the current one in records going back to 2006.
“Having Europe on board with the recovery certainly helps, but I do think we can carry on if it’s not,” Jack Ablin, who oversees $55 billion as chief investment officer for Chicago-based Harris Private Bank, said in a July 20 phone interview. “It seems the on-the-ground analysts are right. They’re inside, they’re talking to companies, and they’re doing it in a way that they’re able to ignore a lot of these daunting headlines, and seeing that the fundamentals are still going to be there.”
Sales at Coca-Cola, the world’s largest soft-drink maker, would still rise 14 percent this year if its European business disappeared, Bloomberg data show. Revenue in the region has slipped to 14 percent of the company’s total from 17 percent in 2008. The Atlanta-based company said last week that second-quarter revenue climbed 13 percent in Latin America and 15 percent in Coca-Cola’s Eurasia and Africa division.
Europe plunged to 13 percent of Intel’s sales in 2010 from 24 percent in 2000. The contribution from the Asia-Pacific region almost doubled to 67 percent, helping the world’s biggest chipmaker beat analyst earnings and revenue projections for the past eight quarters, Bloomberg data show. On July 20, Intel forecast more third-quarter sales than analysts projected, bolstered by first-time purchases in emerging markets. The shares are up 1 percent since the report.
About 17 percent of sales at Whirlpool come from Europe, down from 21 percent in 2008, data compiled by Bloomberg show. That translates to 8.1 percent of 2010 operating profit. The world’s largest appliance maker would see an 11 percent increase in earnings this year, without any help from Europe, according to analyst projections compiled by Bloomberg.
Wasif Latif, vice president of equity investments at USAA Investment Management Co. in San Antonio, which oversees $50 billion, said in a telephone interview on July 21 that a collapse in European earnings brought on by the sovereign debt crisis could spur panic worldwide and U.S. shares would plunge.
The 32 European nations tracked by Bloomberg had combined gross domestic product of $18 trillion in 2009, more than the U.S. at $14.1 trillion. Losses similar to the 2008 financial crisis would bleed into U.S. profits through local operations, Latif said.
“The global capital markets and the economies of the world are so intertwined and interlinked, a crisis in one corner of the world cannot be ignored by the rest of us,” Latif said. “Part of me says I’d rather not know what the ultimate impact would be because of what we saw in ‘08.”
A sovereign default or a credit event in Europe “would likely trigger contagion to the core euro-area economies with severe economic consequences,” according to an International Monetary Fund staff report released July 19. To avoid such a reaction, euro-area leaders decided last week in Brussels to empower their 440 billion ($632 billion) rescue fund to buy debt across the 17 nations that share the common currency.
Moody’s Investors Service downgraded Greece’s sovereign credit rating by three steps to Ca today, saying the European Union plan implies “substantial” losses for private creditors.
Government measures to bail out indebted countries will keep Europe’s crisis from spurring losses like those from the collapse of Lehman Brothers Holdings Inc. in September 2008, according to First Citizens BancShares Inc.’s Eric Teal. The Federal Reserve and U.S. Treasury didn’t create the Troubled Asset Relief Program or organize aid efforts until after Lehman Brothers filed for bankruptcy and sent the S&P 500 down 4.7 percent twice in the same week.
“If the prospects are that the contagion spreads to other European countries and their financial institutions and it grows to become a systematic problem, then it would have a Lehman-level impact,” Teal, who helps manage $4 billion as chief investment officer at First Citizens in Raleigh, North Carolina, said in a July 20 telephone interview. “But if it’s smaller than that, which seems to be the case here, investors will get past it. With all of that, our favorite market is still the U.S.”
S&P 500 Valuations
Sales in the S&P 500 will rise to $1,041.45 a share this year, the highest ever, analyst estimates compiled by Bloomberg show. Earnings are forecast to gain 18 percent to $99.60 a share. Profits from all countries in Europe represent about $17.92 of that amount, data from Bank of America Corp. and Bloomberg show. Should Europe default or the crisis worsen enough to push those earnings to zero, analysts’ projections show the S&P 500 would earn $81.67 a share.
At the lower level, the S&P 500 is trading at 16.5 times earnings, in line with the average using reported results of 16.4, Bloomberg data starting in 1954 show. The index has been trading at about 14.9 times reported profit this month and 13.4 times 2011 projections.
S&P 500 companies are beating analyst estimates by 8 percent during this second-quarter earnings season. During the three-month period that ended June 30, the index slipped 0.4 percent, the first quarterly drop in a year. While investors may have shied away from equities as European concerns took hold, companies are proving they’re positioned to weather the region’s woes.
“The mistake that earnings forecasters have made is underestimating how good companies can be in growing earnings in a very slow-growing global economy,” Paul Zemsky, the New York-based head of asset allocation for ING Investment Management, said in a telephone interview on July 21. His firm manages $550 billion. “Modest growth in the developed world plus reasonably good growth in the emerging world, I think, puts the whole story together.”