Seeking Alpha
Research analyst, tech, micro-cap, contrarian
Profile| Send Message|
( followers)  

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

Egypt is a mess … again. “At times like these, it feels almost distasteful to write about the impact of the unrest on stocks,” says Barron’s Ben Levisohn.

While I agree, it would also be irresponsible to ignore the impact. After all, the potential for incurring losses in companies vulnerable to the situation is real. And there’s nothing more “distasteful” to an investor than losing money.

With that in mind, here’s a rundown on 12 stocks with enough exposure to the ongoing unrest in Egypt to warrant caution. That includes one company you should avoid at all costs.

No Defense Here

Two weeks after Egypt’s military ousted the elected Islamist government of Mohamed Mursi, the U.S. government put major military contracts with the country “under review,” according to a State Department document sent to Congress on July 16.

The potential for delays or outright cancellations spells trouble for a handful of defense contractors in the United States:

~ Dangerous Stock #1:Lockheed Martin (NYSE:LMT) is under contract to provide 20 F-16 fighter jets and other military equipment to Egypt. Total value? About $1.66 billion. To date, only 57% of the contract has been paid.

~ Dangerous Stock #2:Boeing (NYSE:BA) is set to deliver 10 Apaches this month, as well as 20 harpoon missiles and related equipment in future months under a separate contract. Total sales at risk here could top $30 million.

~ Dangerous Stock #3:General Dynamics (NYSE:GD) is under a $338.2-million contract to provide M1A1 battle tanks. Less than half of the contract has been paid to date.

Ultimately, these contracts only represent a fraction of each company’s overall business. But depending on how long the unrest lasts, it could jeopardize future business opportunities in the region. And the uncertainty promises to weigh on shares.

Bad for Banking and Manufacturing

It’s not just companies selling products directly to Egypt that are at risk, either. Companies with sizeable operations in Egypt are in a bad spot, too. They’re subject to limited (or a total lack of) productivity. And the longer the fighting continues, the worse the impact could be for the following companies – and, in turn, their shareholders:

~ Dangerous Stock #4:HSBC (HBC) employs over 2,000 people at 75 branches in Egypt, which it’s been forced to close at the behest of Egyptian officials. The company’s total exposure in the country checks in at about $10 billion.

~ Dangerous Stock #5:Citigroup (NYSE:C) also closed its branches in Egypt, impacting about 650 employees. The New York-based bank has a little more than $1.6 billion in assets at risk in Egypt.

~ Dangerous Stock #6:Swedish home appliances maker Electrolux AB (OTCPK:ELUXY) employs about 7,000 people in Egypt, equal to about 10% of its global workforce. Its recent production halt could lead to inventory issues.

~ Dangerous Stock #7:General Motors (NYSE:GM) was the first privately owned automaker to open a factory in Egypt. It operates a plant in the suburbs of Cairo, which employs about 1,400 people. After halting production for several days, it’s now proceeding with caution. Like Electrolux, any subsequent production halts could lead to inventory problems.

A Loss of Luster

Gold might be staging a comeback. But I wouldn’t look to play a prolonged rally with this pick …

~ Dangerous Stock #8: Despite being headquartered in Australia, Centamin Plc’s (OTCPK:CELTF) gold mining explorations are based exclusively in Egypt. The company’s major asset is its interest in the Sukari Gold Mine, located in the Eastern Desert of Egypt. Last year, it yielded 262,828 ounces of gold at a cash cost of about $700 per ounce. However, if the unrest continues indefinitely, the company’s chief asset could turn into a major liability – as the ruling powers could revoke the company’s exploitation lease at Sukari.

No Oil or Profit Gusher Here

Egypt isn’t a major oil producer. Instead, its significance to the global energy markets stems from the Suez Canal, which is a vital waterway for the transportation of crude oil and liquefied natural gas.

Nevertheless, there are companies with enough production in Egypt and Libya that losses could lead to a meaningful decline in overall activity (and share prices). If you’re wondering why in the world I’m bringing Libya into the equation, it’s simple: Many pundits fear that the chaos could spread to the country. And I agree.

Add it all up, and the following companies are all the more risky:

~ Dangerous Stock #9:Italy’s ENI SpA (NYSE:E) counts on Egypt and Libya for 10% and 11.5% of daily oil production, respectively.

~ Dangerous Stock #10:Spain’s Repsol S.A. (OTCQX:REPYY) counts on Libya for 10% of its production and 11% of its net asset value (NYSE:NAV).

~ Dangerous Stock #11:Germany’s OMV AG (OTCPK:OMVKY) counts on Libya for 11% of its current production and 22% of its NAV.

~ Dangerous Stock #12:Houston-based Apache (NYSE:APA) counts on Egypt for 19% of production, 17% of its NAV and 24% of cash flow.

As I mentioned above, there’s one company that should be avoided at all costs right now. And as you can probably guess, it’s Apache.

The company possesses the most direct exposure to the unrest in Egypt. Accordingly, its shares hold the most downside potential. I’m not the only one who thinks so, either.

Amir Arif, an analyst at Stifel Nicolaus, just downgraded the stock to a “Hold” from a “Buy.” As we all know, Wall Street’s “Hold” is merely a euphemism for “Sell.” And that’s exactly what I’d do if I owned shares right now. And if you don’t own them, don’t buy them. Even if shares are trading at a discount to book value.

As Arif appropriately points out about Apache, “The risk/reward profile has decreased, near-term catalysts have mostly played out, and while the name remains a value stock, we do not see any key drivers to move the name higher.”

Bottom line: Back in June, James Syme of JO Hambro Capital Management Group said, “Egypt has some interesting opportunities, but both the macroeconomic situation and the political/legislative situation are highly uncertain … It could have a place in a portfolio, but much further out on the risk-reward spectrum.”

Forget “further out,” James! In light of the recent developments, Egypt should be completely out of our portfolios for the foreseeable future. Especially Apache.

Source: State Of Emergency: 12 Stocks To Avoid In Egypt