5 Companies Most Vulnerable to Europe's Crisis
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The market is up to its old tricks and the white-water rapids ride continues. As investors, we face difficult choices in the best of times. In today’s climate of raging uncertainty (political and economic) and the increasing domestic corporate dependence on foreign revenue, making solid investment choices is more challenging than ever. The variables that must be considered are growing exponentially and many investors are bowing to the temptation to move their dollars into gold, silver and other precious metals. It is difficult to make a persuasive case against such a shift. Today I will examine five companies that are particularly vulnerable to overseas demand. I will examine fundamentals and offer opinions on the future of each equity.
McDonald's (NYSE: MCD) recently missed analyst expectations by a nickel, even as actual revenues rose. With almost 40% of McDonald’s revenues generated in Europe, the company is extremely vulnerable to currency fluctuations, as are all the companies we analyze here today.
In fact, currency movements were responsible for the recent earnings miss. McDonald’s is trading at around $89 with a market capitalization of about $90 billion. Trailing twelve month price to earnings is 16.61, with a price to earnings growth ratio of 1.70. Price to book is higher than value investors would like at 6.35 but no one could fault the company’s return on equity of 38.2%, quarterly year-over-year revenue growth of 7.1% and quarterly year-over-year earnings growth of 4.8%. Financially, McDonald’s is marginally healthy, with a debt to equity of 87.17 and a current ratio of 1.17. The value investor will also appreciate the dividend, yielding 3.1% against a comfortable payout ratio of 50%. On a discounted cash flow basis, the stock is overvalued some 31%. Nevertheless, a number of analysts have a $100 plus target on the stock.
E. I. du Pont de Nemours and Company (NYSE: DD) trades at around $49 per share and has a market cap of about $46 billion. The price to earnings ratio of 13.05, price to earnings growth ratio of 1.43 and the price to book of 4.71 combine to make the stock slightly more attractive to the value investor than McDonald’s. Dupont’s return on equity of 32.86% is on par with McDonald’s. Dupont has a fairly robust quarterly year-over-year revenue growth result of 11.7% and a decent quarterly year-over-year earnings growth of 4%. Dupont’s real weakness is in its balance sheet. Debt to equity is 142.18 and the current ratio is 1.58. This high debt to equity is not unusual in such a capital intensive enterprise, but it does not suggest that the dividend, yielding 3.4% against a 44% payout ratio is in jeopardy. The stock trades about 18% over its discounted cash flow value and has a median target of $57 per share.
Boeing (NYSE: BA) trades at about $73 per share and has a market capitalization approaching $55 billion. It has an attractive price to earnings ratio of 12.63, a price to earnings growth ratio of 1.5, and a price to book of 11.01. If you can’t choke down that price to book, Boeing has a fantastic return on equity of 95.26% that may help. Quarterly year-over-year revenue and earnings growth are impressive at 30% and 57.5% respectively. Less impressive is the debt to equity ratio of 227.03. The current ratio is solid at 1.21. Boeing’s financial strength is not as bad as the debt to equity position may suggest. The company has excellent cash flow and is, after all, a very capital intensive enterprise. Boeing pays a decent dividend, yielding 2.3% against a modest payout ratio of 29%. On a discounted cash flow basis the stock is overvalued by around 68%. Boeing is not a stock I feel comfortable with. The market for its planes is competitive and volatile. Despite a high target of $96 and a favorable June upgrade from Oppenheimer to "outperform," Boeing makes my knees weak.
Kraft Foods (NASDAQ: KRFT) trades at about $39 and has a market cap of around $70 billion. It derives roughly one-third of its revenue from Europe. It is a tad expensive with a price to earnings multiple of 19.61. Price to earnings growth is pegged at 1.46 and I like the price to book of 1.93. The return on equity is exceedingly disappointing at 9.56%. Quarterly year-over-year revenue and earnings growth are both in positive territory at 4.1% and 1.8% respectively. Kraft’s debt to equity is tolerable at 77.32 and the current ratio of 0.92 is near expectations. You have to like the dividend, yielding 2.9% against a bloated payout ratio of 58%. On a discounted cash flow basis, the stock is overvalued by 25.44%. Analysts have a median target on the stock of $44.
Caterpillar (NYSE: CAT) trades at around $82 and has a market cap of $53 billion. It boasts an attractive price to earnings of 10.28 coupled with an equally attractive price to earnings growth ratio of 0.49. Price to book isn’t bad at 3.56 and the return on equity of 37.4% is very good. Nothing un-appealing about the quarterly year-over-year revenue and earnings growth ratios, which come in at 23.4% and 29.5% respectively. Caterpillar is another capital intensive company sporting an abysmal debt to equity ratio of 232.43 but a great current ratio of 1.39. It has a reliable dividend track record and is yielding 2.3% against a rather modest payout ratio of 23%. From a discounted cash flow perspective, the stock is slightly overvalued by 8.54%. Analysts put a median share price target on $120, which I regard as aggressive.
These five companies, all at great risk from Europe’s economic woes, are also companies with records of long term performance. I like two of the five as an investment. Boeing doesn’t make the cut because Europe naturally favors Airbus and Asian customers seem equally divided between the two. Kraft doesn’t make the cut either. I think the return on equity reveals weak management, it is likely to suffer cost increases from the U.S. drought and I believe it will experience a lackluster 2012 and 2013 as a result. Du Pont is sure to benefit from the continued growth in emerging nations, Myanmar being a great example, but I fear the impact of lawsuits arising from Du Pont’s failed Imprelis herbicide will strip large chunks of earnings from the income statement. McDonald’s has a solid footing in Asian markets and will continue to do well domestically. Caterpillar, although highly cyclical, is a proven leader in its market and enjoys global respect.
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