3 Stocks with Dangerous Exposure to the Eurozone
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s hard to believe anyone would envy the rancorous budget debates in Congress last summer, but the leaders of the EU might have that inglorious honor, with budget and debt talks currently threatening the very existence of the hard-earned economic and political union. Although the sovereign debt crisis across the pond will not topple Barack Obama as it felled Silvio Berlusconi or George Papandreou (at least not until November), simply keeping an eye on the stock market reveals that the U.S. economy is not immune to European anxieties. It is crucial to understand the connection between American and European economies as Merkel and co. continue their quest to unite the goals of seventeen countries to save the euro. One would be hard-pressed to find a U.S. industry that is not at least indirectly exposed to the Eurozone in this increasingly globalized world. However, some industries could be in more danger than others in upcoming months as America’s largest trading partner continues to flounder.
The most devastating byproduct of the European sovereign debt crisis to date has been ambiguity surrounding the effect on European growth and imports. In the U.S., materials, energy, automobiles, consumer durables, and capital goods are some of the primary victims of a European slowdown. The materials sector in America accounts for 19.8% of its sales from Europe. Renewable energy and biotech firms form traditionally defensive industries, which means they are usually unaffected by economic downturn. Yet, the social democracies in Europe are some of the lead investors in these sectors as they looked toward progress addressing concerns such as global warming. Automobile manufacturers and companies that make parts integral in the manufacturing of automobiles are also liable to be hurt by the Eurozone, as the continent imports many of its vehicles (evidenced by the 27.6% of sales U.S. manufacturers derive from Europe). U.S. companies that specialize in consumer durables and apparel rely upon Europe for 16.2% of its revenue. Consumer services and capital goods rely on Europe for 16.7% and 16.4% of total revenue, respectively.
Below are three U.S. stocks particularly likely to be impacted; these corporations sell products within the previously named industries and all rely upon a strong European demand as a foundation for their markets.
Tech Data Corporation (NASDAQ: TECD) is a company based in Clearwater, Florida that distributes technology products. Unlike the many U.S. firms that distribute the majority of their computers and accessories throughout the states, TECD mainly sells its products to Europe, which accounts for $3.81 billion, or 58.2%, of its net sales. European growth was largely responsible for the products' recovery from the 2008 recession, though first quarter results were mostly negative. Sales were marked by a decrease of 7% on the continent over the prior-year first quarter. A reversal of the company’s fortune in Europe could reverse the entire trajectory of the corporation, which recently revised its international strategy to adjust for international uncertainty. The new strategy requires a $15 million outlay to readdress its logistics on the European continent. Tech Data has attempted to manage expectations for its earnings, as it has publicly expressed predictions for “flat to low single-digit sales growth” in the European marketplace. In 2012 thus far, the stock has declined by 4.6%, and quarterly cash conversion cycles are below average levels. Analysts are still expecting TECD to finish 2012 with an EPS of $5.65, an 11% increase if consensus holds.
Owens-Illinois (NYSE: OI), the company responsible for the production of most glass containers, derives 42% of its sales from Europe. As major producers of wine, beer, and other beverages on the European continent struggle, the demand for the creation of their bottles also suffers. Since 2004, OI has been the largest glass-packaging manufacturer on the European continent, and its stock price reflects a value much larger than that during its nadir in the 2008 recession, when the beverage industry was equally low. Earlier this year, Citigroup declared Owens-Illinois one of the most endangered U.S. stocks as the crisis progresses, due not only to its large exposure to Europe, but also to its altogether weak balance sheets. If the European economies continue to struggle, as is likely the case, OI is one of the companies that will most immediately take a hit. This year, the stock is down almost 5%, but beat the Street’s first quarter earnings expectations ($0.73 to $0.66), so investors would be wise to continually monitor the situation.
Ford Motor Company (NYSE: F) was the most resilient American automobile manufacturer during the recession, as the only one of the “Big Three” (Ford, General Motors (NYSE: GM), and Chrysler) not to need a bailout by the U.S. government. Therefore, it did not rely on bureaucrats to manage the company’s strategic operations, which include its gradual expansion overseas. However, Ford Motor Company is the largest American automaker in the European market; 27.6% of its sales are generated there. As overall car demand in the Eurozone is expected to decline by around 1 million by the end of 2012, demand for foreign cars is especially likely to suffer, with the U.S. dollar continuing to gain strength against a weakening euro. The first quarter entailed a near 60% decline in year-over-year earnings for the Ford Motor Company. The stock is currently trading at a P/E (2.1X) below the industry average (8.5X) and GM (4.6X), though a lower valuation may be warranted given the company’s exposure to our neighbors across the Atlantic.
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This article is written by John Kocsis and edited by Jake Mann. They don't own shares of any of the companies mentioned above.