by Jim Woods | November 18, 2011 8:00 am
Europe’s fiscal mess continues to dominate the headlines. Late Wednesday, stocks sold off sharply after fresh warnings surfaced over the potential impact of the euro zone’s debt crisis on the global economy and banking system. The markets further dipped Thursday on concerns about French and Spanish bond yields. Ratings agency Fitch cautioned that U.S. banks could be “greatly affected” if Europe’s debt crisis is not resolved quickly.
That news caused traders to dump bellwether financials such as Bank of America (NYSE:BAC), JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS). But it’s not just U.S. banks that could begin to feel the wrath of Europe’s debt debacle. If the debt mess prompts the region to roll over into recession, it could wreak havoc on U.S. companies who rely heavily on revenues generated from European exports.
According to Standard & Poor’s, companies in the S&P 500 Index saw about $1.36 trillion in European sales last year, which is approximately 30% of all overseas sales. That makes Europe the largest market for U.S. goods.
That number is significant, but it might be even greater, as many companies don’t break down their foreign sales by region. What this means is that any substantive decline in Europe’s ability to buy goods from U.S. companies almost certainly will have a negative effect on many corporate bottom lines.
So, what stocks are most vulnerable to a debt-induced euro zone recession?
The most obvious answer is companies that have a lot of European exposure. In a Nov. 8 note, Citigroup Research said that “deeply cyclical” industries would be most affected, but the note also said defensive sectors were particularly susceptible to a European slowdown.
On the cyclical front, we have companies like Ford (NYSE:F) and General Motors (NYSE:GM). GM recently reported that its third-quarter net profit dropped 15% due to losses in Europe, so we’re already starting to see companies stuck in European muck.
Defensive giants such as Coco-Cola (NYSE:KO), Philip Morris (NYSE:PM) and Kraft Foods (NYSE:KFT) all have significant exposure to Europe, and all rely heavily on sales in Europe, the Middle East and Africa for a significant portion of their respective revenues.
Other companies with heightened exposure to Europe include gold and copper giant Newmont Mining (NYSE:NEM), chemical maker DuPont (NYSE:DD) and even fast-food behemoth McDonald’s (NYSE:MCD). Tech is vulnerable, too — especially firms like diversified enterprise storage and software giant EMC Corp. (NYSE:EMC).
To put a twist on a popular phrase, what happens in Europe doesn’t stay in Europe. If a recession hits the euro zone, investors holding the aforementioned companies might want to duck and cover.
(And to protect your portfolio from Europe’s problems, check out these two homegrown sectors with healthy U.S. companies that do all their business domestically.)
As of this writing, Jim Woods did not own a position in any of the aforementioned stocks.
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