Is Europe the Next Big Bet?

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

International prospects have been a huge factor for investors lately. But with Asian growth being cut, it raises concerns that the Pacific gravy train won't last forever. What about the Euro-zone? Is expansion there viable? Or is it all doomed for years to come?

The Euro-zone's contraction-stage business cycle isn't going to be pumping out growth numbers like China any time soon. But identifying potential before others is the reason we invest. Basically, companies investing in Europe may see bigger profits than their competitors in the coming years.

And no, you don't have to go on a Lord of the Rings quest to find companies with future growth potential in Europe. In fact, some of the most popular stocks today are the ones that are rarely considered for their Euro-zone prospects.

European expansion

Netflix (NASDAQ: NFLX), the banal video-streamer that no one wants to hear about is up to some interesting international shenanigans. Many in Europe watch almost as much TV as those in the U.S. And because of that, the company is branching out into regions, like Canada, Latin America, and even Europe.

But international success hasn't helped profit margins (which have dropped from about 9% to 2.8% recently). Even still, overseas investments brought in a ton of money that now accounts for about a quarter of its revenue. That's a really big deal for a company whose primary operations are in North America.

Despite the expansion, Netflix still only carries a debt to equity ratio of 0.86 and is ready for even more expansion. But bears claim that media licensing is expensive and the stock is priced sky high. Its PEG ratio of 8 tells us that many have already jumped on the Netflix bandwagon. Still, expansion in Europe could balance the scales.

Tip-toeing in Europe

While Chipotle Mexican Grill (NYSE: CMG) deals with Tex-Mex, (casual American dining), a lot of the same rules still apply. Chipotle is almost fully vested in domestic operations, but is dropping hints that it's pressing for growth in Europe.

But the company's international growth appears to have stalled in recent quarters. Chipotle seemed to be twiddling its thumbs on international expansion and for good reason. Perhaps management recalls when Yum! Brands failed with its launch of Taco Bell in Europe during the 1990s.

But with an under-capitalized European market, solid profit margins, and literally no debt, Chipotle has the means to expand. Same-store sales in America are slowing so international expansion could be key. Putting restaurants in Europe could open the door to many exciting opportunities.

A shining example

Yelp (NYSE: YELP), the social consumer app, has already implemented a stellar business plan for expansion in Europe. The company continues to leverage an increasingly popular service (socially-informed shopping) with an increasingly popular platform (mobile). With everything working, there's no reason for it to stop expanding, even with its current negative profit margins.

Regarding Europe, Yelp didn't test the waters, it jumped straight in. It even went so far as to buy out a similar company, Qype, after it became popular. The $24 million dollar purchase wasn't financed by debt and the company has potential for more investments given its huge current ratio of 8.6.

As Yelp moves into positive earnings territory next year and Netflix sees a huge influx of international business, you might wonder why Chipotle made this list. But the company recently said that it would be ramping up operations in London, I consider this a great sign of things to come.

Underrated, still?

There are many U.S. companies looking to Europe, so this list is hardly all inclusive. But finding solid businesses, that balance cautious capital allocation with aggressive expansion, are hard to come by. Chipotle, Netflix, and Yelp seem to have found the right recipe for branching out into an ailing region. Perhaps it's time you took a look at their prospects to see what all the fuss is about.

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Ryan Gilbert has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Netflix. The Motley Fool owns shares of Chipotle Mexican Grill and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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