The market correction has taken down almost every stock, and due to the complex nature of the European debt crisis, contagion issues that could lead to a global recession are not likely to go away anytime soon. While Greece remains an issue, it might not be nearly as important as the problems facing Spain and possibly other countries as borrowing costs remain elevated and even trend higher. While the markets rallied just before the Greek elections on hopes for a positive outcome and major central bank policy action, the outlook for many companies remains cloudy in Europe. Unemployment in the Eurozone is now about 11%, and it appears to be rising. In certain countries like Spain, the unemployment rate is over 20%. The impact of the turmoil, unemployment, and lack of consumer and business confidence could really start to show up for some companies in the coming quarters.
Already, we have seen companies like McDonald's (MCD) report weakness in European sales, and if a value oriented food company like McDonald's is seeing a slowdown in Europe, other companies appear to be at much greater risk of reporting weak financial results in the coming quarters. With that in mind, here are a number of companies that derive a large percentage of revenues from Europe. Investors might want to avoid these stocks for now and possibly look for buying opportunities if these stocks drop on a quarterly earnings miss, especially since earnings season is just weeks away:
Electronic Arts, Inc. (EA) shares started the year at about $18, but the stock has been trending lower, and it now trades close to the 52-week low. This company develops and markets video games and it has some popular titles like SimCity, Star Wars: The Old Republic, Battlefield 3, FIFA Soccer 13, and many more. Investing in companies that develop video games can be frustrating as consumers can be fickle and lose interest quickly. It's also a highly competitive industry and new systems, or a new platform can rapidly change everything for a company. Some investors are concerned that mobile device game and app makers like Zynga, Inc. (ZNGA) will reduce demand for more traditional video game makers. Electronic Arts is working to expand revenues into this area and that could provide growth.
However, EA derives about 46% of its revenues from Europe and that could elevate risks for investors for a potential earnings miss in the future. Since the unemployment rate is much higher for people under the age of 35 in countries like Spain and since gamers are often in that age group, the weak economy in Europe could be a major challenge for this company.
Here are some key points for EA:
- Current share price: $12.44
- The 52 week range is $12.20 to $26.13
- Earnings estimates for 2012: $1.10 per share
- Earnings estimates for 2013: $1.29 per share
- Annual dividend: none
Johnson Controls, Inc. (JCI) shares were trading around $32 for most of 2012, but the stock recently has given into pressure from potential exposure to Europe and weak auto sales in some countries. This company is involved in a few economically-sensitive industries as it designs and manufactures controls for heating, ventilating, air-conditioning, and refrigeration systems. It also makes automotive products, including electronic components, seating, and many other interior car parts.
Johnson Controls receives about 36% of its revenues from Europe and that could be one reason why the company revised guidance to the low end of the range after it reported second quarter results for fiscal year 2012. Analyst estimates have been trending lower, and with the Eurozone economy looking like it will get worse before it gets better, earnings estimates might still be too high.
Here are some key points for JCI:
- Current share price: $28.21
- The 52 week range is $24.29 to $42.92
- Earnings estimates for 2012: $2.71 per share
- Earnings estimates for 2013: $3.31 per share
- Annual dividend: 72 cents which yields 2.6%
Carnival Corporation (CCL) shares recently surged to almost $35, and now the stock is overbought. Just days ago, the shares were trading around $31, but perhaps over optimism about the elections in Greece, the stock has rallied. It looks like an opportunity to sell, because the Greek elections do not guarantee that the country will not eventually be forced out or exit the Eurozone. Many analysts expect Greece to leave sooner or later. Furthermore, the elections will not stimulate growth in the European economy.
With unemployment at record levels in many countries, and with the European economy likely to get worse before it gets better, Carnival might be seeing weak bookings. In particular, the Ibero brand cruise line which targets Spain, Aida and other brands which target the European consumer, could be impacted. Global economic weakness is an issue for Carnival as it operates many brands around the world including: Carnival Cruise Lines, Seabourn, Holland America Line, Princess Cruises, Cunard, AIDA, Cunard, Ibero Cruises, P&O Cruises and Costa Cruises.
Carnival has about 38% of its revenues coming from Europe. With the stock now trading at over 20 times earnings, while the rest of the market trades at an average price to earnings ratio of just about 13, the stock could be poised to drop big on any earnings miss.
Here are some key points for CCL:
- Current share price: $34.76
- The 52 week range is $28.52 to $38.83
- Earnings estimates for 2012: $1.63 per share
- Earnings estimates for 2013: $2.29 per share
- Annual dividend: $1 per share which yields about 2.9%
First Solar (FSLR) is one of many battered stocks in the solar sector. The industry has been heavily dependent on government subsidies, especially in Europe. With countries like Spain and Italy feeling strained in government budgets, the solar subsidy programs are under pressure.
First Solar receives about 38% of its revenues from Europe, and with the economic situation deteriorating, investors are right to be concerned. Based on current earnings estimates, the stock looks incredibly cheap as it implies a price to earnings ratio of just about 4.
However, earnings estimates might be too high, especially since the company recently posted a loss. For the first quarter of 2012, analyst had been expecting a profit of about 48 cents, but First Solar posted a loss of 8 cents per share, and a 12% drop in revenues. Many investors have tried to go bargain-hunting in solar stocks and for most, the attempts have backfired. With the huge decline in this stock, many investors are likely to start selling it for tax-loss purposes when the 4th quarter starts in about 3 months. Because of this, it might make sense to wait before considering an investment. Also, after such a large drop in the stock, it would be a hopeful sign if insiders were aggressively buying shares, but that has not been the case. This could mean that insiders still don't see a buying opportunity.
Here are some key points for FSLR:
- Current share price: $13.95
- The 52 week range is $11.43 to $142.22
- Earnings estimates for 2012: $4.06 per share
- Earnings estimates for 2013: $3.94 per share
- Annual dividend: None
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
