U.S. multinationals are outperforming companies stuck at home. U.S. companies with significant exposure overseas are generating more and more of their total profits in those foreign operations.
That makes perfect (and common) sense. If the U.S. is growing at 2% and the developed nations are growing at 7-9%, there's more opportunity for growth and profits overseas. Many analysts are predicting that the S&P500 could take out (or come within a hair of) the highs of 2007 driven by their foreign profits.
Here are a few examples of companies and their percentage of foreign revenues. Wal-Mart (WMT): Total revenue: $420 billion. Portion from overseas: 26%; Exxon-Mobil (XOM), $342 billion in revenue, 45% from overseas; General Electric (GE), $149 billion in revenue, 54% from overseas; Bank of America (BAC), $134 billion in revenue, 20% from overseas; Ford (F), $129 billion in revenue, 51% from overseas; IBM (IBM), $100 billion in revenue, 64% from overseas; Amazon (AMZN), $34 billion in revenue, 45% from overseas; McDonald's (MCD), $24 billion in revenue, 66% from overseas; Nike (NKE), $21 billion in revenue, 50% from overseas.
Almost all of the S&P500 companies have reported and 54% of those companies have beat earnings expectations. But according to Savita Subramanian, equity strategist for Bank of America Merrill Lynch, the bigger multinationals that derive more than 50% of their profits from overseas outperformed the U.S. corporations that are homebodies - to a large degree.
As I had pointed out in this article on U.S. multinationals and repatriation of foreign profits, the U.S. markets and earnings have decoupled from the U.S. economy.
That said, many journalists and analysts still seem to be getting it wrong. Even the headline in my favourite Canadian paper, The National Post, used the headline "U.S. multinational giants bring home the profits". Well, as I pointed out in this article, "Sorry your dividends are not coming home any time soon", the profits of U.S. multinationals are over there and they're staying there. Furthermore, many U.S. corporations are moving profits generated in the U.S. to overseas foreign operations. Johnson & Johnson (JNJ) now holds almost all of its cash overseas.
In the end, the profits are on the balance sheet, and those healthy profits will positively affect the share price. But the foreign earnings trend is tricky business that does not get a lot of attention these days.
And there are two important distinctions to make. One, the profits are over there and staying here. Two, some of these companies are popular dividend payers, and those foreign profits are not being returned to shareholders as dividends thanks to the current tax laws that make it advantageous to keep those profits overseas.
It will be more than interesting to see how this plays out via the political gamesmanship and tax code. Perhaps there will be another foreign profits repatriation holiday?
One day, this could all hit the front page.