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Europe may finally provide US firms a profit boost
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Europe, long a scapegoat for weak earnings at US multinational companies, is now looking like a more dependable source of profits. It could make some stocks that have lagged this year’s rally more enticing to investors.
Big players in the technology sector, which has the highest exposure to Europe, are among those best positioned for a boost to the bottom line from the region’s gradual recovery.
On a price-to-earnings basis, tech as a group is nearly 8 percent cheaper than the benchmark S&P 500 index, now at its most expensive since late 2008, suggesting some tech stocks may have room to catch up.
Tech names with some of the highest exposure to Europe, based on Bank of America Merrill Lynch data, have mostly underperformed this year. IBM is down 8.5 percent on the year, while Oracle is up just 3.7 percent. Both derive at least 32 percent of their sales from Europe. Meanwhile the S&P 500 is up 25 percent.
Energy, which also has high exposure to Europe, lags the S&P 500’s gains as well.
The eurozone, a source of weak sales for S&P 500 companies for several quarters, emerged from its recession earlier this year. If its recovery persists, the region could help US earnings get off their own path of lackluster growth.
“It’s important for investors to realize Europe doesn’t have to be a hole anymore in earnings,” said Joseph Quinlan, managing director and chief market strategist at US Trust, Bank of America Private Wealth Management in New York. “Even a little growth in Europe is going to go a long way to help boost the profitability of US multinationals.”
To be sure, a rebound in Europe is expected to be slow and spotty, much like the US recovery, and many economists argue that optimism about the improvement is premature.
While the European Commission has forecast 1.1 percent GDP growth in 2014 after a 0.4 percent contraction this year, the European Central Bank last month surprised investors by cutting interest rates to help spur its tepid growth.
No premium for foreign exposure
Relative enterprise valuation data on companies with the most foreign exposure are trading close to their steepest discount to more domestically oriented names in the last decade, BAML data showed, while its global fund manager survey showed managers are overweight on US and US-centric stocks and underweight on more foreign-exposed ones.
The tech sector’s forward PE is 14.1 times expected earnings, among the lowest of the 10 S&P sectors, Thomson Reuters StarMine data shows. The PE for energy, which has the third-largest exposure to Europe after materials, is 13.1, lowest of any sector.
Meanwhile, one of the least-exposed sectors to Europe, consumer discretionary, sports a multiple of 18.2. The overall S&P 500 is trading at 15.3 times forward 12-month earnings, the most expensive it has been by that measure since the fourth quarter of 2008.
Within tech, IBM’s PE is 9.9, and Oracle’s is 11.7. Hewlett-Packard’s forward PE is 7.5, expanding from around 4 in January, as its stock is up nearly 90 percent this year.
As a region, Europe accounts for the biggest part of overseas sales for US companies, representing about 10 percent of S&P 500 company sales, S&P data shows.
“I would say there’s still upside in these global cyclical companies,” Quinlan said. “There’s room to put money to work still.”
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