by Dan Burrows | December 6, 2012 1:18 pm
Someone call Life Alert.
The economies of Europe have fallen and they can’t get up, and it’s creating a situation that bodes ill for an already bleak revenue picture at a number of U.S. multinationals.
The European Central Bank confirmed Thursday what was already apparent to investors and plenty of U.S. companies generating significant sales in the 17 countries that use the euro: The eurozone economy is contracting again.
The ECB slashed its gross domestic product forecast for next year, saying the eurozone’s economy is now going to shrink 0.3%. That’s a huge reversal from the bank’s prior outlook for 0.5% growth.
Furthermore, although the ECB left rates unchanged at its most recent meeting, it maintained its dovish and accommodative stance on monetary policy, igniting a selloff in the euro against the dollar.
The double whammy of a shrinking eurozone economy and weaker euro makes an already depressed revenue picture for some major U.S. multinationals all the much tougher for 2013.
It’s already ugly enough. As companies were reporting disappointing third-quarter sales, a number of them also warned about future revenue weakness, especially in Europe, and the negative impact a stronger dollar was having on top-line results.
For example, of the 12 companies in the Dow Jones Industrial Average that provided revenue growth numbers for Europe last quarter, 10 reported a year-over-year decline in those figures, according to FactSet (NYSE:FDS).
General Electric (NYSE:GE), for example, said service orders in Europe tumbled 12%. Microsoft (NASDAQ:MSFT) said “tough conditions in Europe” caused revenue to drop in the mid-single digits.
Indeed, McDonald’s (NYSE:MCD) was the only Dow component to report any growth in European revenue — its same-store sales rose 2% — but, as FactSet notes, that was the lowest growth rate posted by the hamburger chain in Europe over the trailing four quarters.
At the same time, hordes of companies said the effects of exchanging weaker euros into stronger dollars hurt top-line results.
McDonald’s said unfavorable foreign exchange hurt third-quarter results by 8 cents a share. Fellow Dow stocks said much the same. 3M (NYSE:MMM) said forex lopped more than 3% of quarterly revenue, Johnson & Johnson (NYSE:JNJ) reported a drag of 7.5% and Coca-Cola (NYSE:KO) took a 5% hit.
All these companies derive substantial parts of their revenue from Europe. No wonder the blue-chip index is lagging so badly in 2012.
For the year-to-date, the Dow — that bastion of multinationals — is up just 7% on a price basis, while the far more diversified S&P 500 has gained more than 12%.
Companies that derive much more of their revenue domestically are likewise clobbering the Dow. The small-cap Russell 2000 is up 11% for the year-to-date, while the Russell Midcap Index has gained nearly 13%.
So be forewarned: The latest outlook from the ECB means we could see even more disappointing top-line numbers out of the big blue chips next year, as well as from companies like Ford (NYSE:F), Honeywell (NYSE:HON) and Ingersoll-Rand (NYSE:IR).
True, the U.S. economy is hardly healthy, but at least — unlike Europe — it’s up and walking. As you look toward 2013, it might pay keep your portfolio skewed toward companies with revenue streams closer to home.
As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.
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