Roberto Pedone will be a guest on CNBC's "Squawk Box" on the morning of Friday, May 21, to discuss stocks that are overexposed to the euro. Tune in!
By Roberto Pedone
Posted on May 18, 2010
The euro has been trending down for well over a year now, fully in control of the bears. Since late November 2009, the world’s second-favorite reserve currency has dropped a whopping 17%. During the same time frame, the U.S. dollar has rallied 21%.
The plunge in the euro has recently been accelerating due to the Greek fiscal crisis and fears that a larger debt contagion will spread to other EU nations, such as Spain, Portugal and Italy. Nobody knows for sure if the sovereign debt issues plaguing Greece will ultimately spread, but many global economists think that Greece is just the tip of the iceberg.
Those beliefs are easily understandable when you consider the debt levels that some of the EU nations are currently carrying. Public debt forecasts for 2010 as a percentage of GDP are Greece at 124.9%, Italy at 116.7%, Portugal at84.6%, Ireland at82.9% and Spain at 66.3%. Budget deficit forecasts for 2010 as a percentage of GDP are Ireland at -14.7%, Greece at -12.2%, Spain at -10.1%, Portugal at -8.0% and Italy at -5.3%.
Last week, the Greek bailout hit the wires with a mind-boggling 750 billion euro (almost $1 trillion) debt rescue fund, including a $39 billion line of credit from the International Monetary Fund. Once that news was announced, the euro rallied sharply on short covering, but it has since given up all of those gains.
The concern now in the market is that the European Central Bank will have to turn its printing presses up to full blast to try to inflate its way out of this mess. The even bigger problem is that since Greece was bailed out, Greek bondholders haven’t been asked to feel the pain on their investments. Investors who bought credit default swaps, though, are going to lose big time. This is systematically setting up a pattern of more future bailouts and possibly inflation, since investors aren’t being asked to lose money on sovereign debt.
Just consider how we did it in the U.S. We bailed out Goldman Sachs Group (GS), American International Group (AIG) and a number of other large domestic financial firms, while Lehman Brothers and Bear Stearns were allowed to fail. But it strikes me as unlikely, even impossible, that in Europe, an entire country would be allowed to default or cease to exist. The EU is going to have to bail out every troubled nation or face a lot of blowback.
If the debt crisis that has crippled Greece spreads throughout the rest of Europe, which I think is highly likely, a number of American-based companies could get hit hard due to their exposure to the euro and to what will most likely be a depressed European economic environment.
So which U.S.-based companies have the most worrisome exposure to Europe?
One U.S. company with large exposure to Europe is Apple (AAPL), which currently sits at around 27.5% exposure to Europe. It’s hard to imagine that strapped EU consumers and cost-conscious businesses will be splurging on already-pricey Apple products, which will become even more expensive if the euro continues to drop.
Even more concerning for Apple in Europe is that if sales for iPhones and iPods dramatically slow down, the halo effect could lead to slower sales for iPads, once the iPad is released in Europe, as well as Apple desktops and laptops. This could seriously crush growth for Apple in Europe and depress earnings since the company has such a large exposure to the region.
Another name that could be in trouble is the world’s largest seller of supplemental health insurance, Aflac (AFL). On a recent conference call, the company said it has $2 billion in bonds tied to banks in Greece and Portugal. The company’s Chief Investment Officer, Jeremy Jeffery, said on that call that Aflac also holds around $295 million in Greek sovereign bonds.
If you have ever been to Europe, you know McDonald's (MCD) locations are easy to find. The company just reported a rise in same-store sales of 5.3% in Europe, but that could quickly change if Greece’s problems become all of Europe’s problems. McDonald’s is exposed to Europe by a whopping 41%.
Other consumer product companies with big exposure to the EU include Philip Morris (PM) at 46%, HJ Heinz (HNZ) at 33.6% and Kraft (KFT) at 21.7%. Billionaire investor Warren Buffett recently cut his position in Kraft by almost a quarter, to 106 million shares. Buffett also decreased his stakes in Procter & Gamble (PG) and Johnson & Johnson (JNJ), which both have more than 20% exposure to the EU.
Electronic Arts (ERTS), maker of popular video games such as Madden NFL, Tiger Woods PGA Tour and FIFA Soccer has some very big exposure to Europe, with 38% of its sales coming from the area.
In the drug and health care sector, there are a number of large U.S. corporations that are heavily exposure to Europe. Gilead Sciences (GILD) sits at 42.5%, Baxter International (BAX) at 33.3% and Pfizer (PFE) at 29.1%. Global health care giant Merck (MRK) could also take a big hit from being overexposed to Europe since the company recently acquired Schering-Plough, which generates 48% of its sales from Europe.
First Solar (FSLR), the world’s largest maker of thin-film solar power modules, makes 77% of its sales in Germany and France. Of course, since the company sells so much into the EU, it hedges currencies to help offset some of that risk. Recently, a Barclays Capital analyst said that First Solar may outperform Chinese competitors because it bought more protection against the plunging euro.
That might be true, but protection or not, sales could also get hit at First Solar if Germany and France slash feed-in tariffs for solar power. Also, falling oil prices could deliver a second blow to First Solar. As oil trades lower, companies will less and less of an economic benefit in switching over to solar panels.
For more U.S. stocks that are heavily exposed to Europe, check out the Euro Stocks portfolio on Stockpickr.
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At the time of publication, author had no positions in stocks mentioned.
