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June 07, 2012 at 12:58 PM
The economic crisis in Europe seems set to rattle on all summer, with no real end in sight. With Greece still teetering on the brink of exiting the Euro, and at least eight of the EuroZone nations officially in recession – defined as two consecutive quarters with negative economic growth – American investors continue to look nervously across the ocean and wonder what the fallout here will be.
The most immediate impact for American industries has been, and will continue to be, those corporations that derive significant percentage of their earnings from Europe. There are two basic reasons for this. First of all, consumers, companies, and especially governments in Europe have very little disposable cash to spend on American goods. Secondly, with the Euro losing value, customers for American goods will be buying them with a rapidly depreciating asset. When American companies convert that revenue into dollars, it is now worth significantly less.
That combination has become crippling for many American exporters. Cisco Systems has become the poster boy for the U.S. corporations that have been severely damaged by the European economy. Cisco gets around 20 percent of its revenues from European sales, and even though it roughly met the Wall Street estimate for its earnings announcement two weeks ago, it also provided guidance numbers for the next quarter that indicated uncertainty toward its European sales. As a result, Cisco’s share price dropped by 10 percent in a day.
Cisco’s networking equipment appears to be the type of big-ticket item that suffers the most from the European downturn. Other large industrial companies are also seeing slowing sales in Europe. In May, Dell Computer announced that its revenues had dropped by 4 percent in the second quarter, with a falloff in sales to European corporate clients cited as a major reason. Similarly, NetApp CEO Tom Georgens warned that the European situation could hold down sales of its data storage equipment over the next year, driving its share price down 18 percent in one day.
U.S. automakers, which get an estimated 27 percent of their sales from Europe, have also seen sales suffer on the continent. General Motors saw its European sales decline by 12 percent in its most recent quarter. Ford’s CFO has estimated its European losses for 2012 at $500 million to $600 million.
Other American companies doing business in Europe have seen less of an effect, though. McDonald’s gets almost 40 percent of its revenue from Europe, even more than it gets from North America. But the crisis has had little impact on its sales so far. When reporting its quarterly earnings in April, McDonald’s noted that same-restaurant sales in Europe were up by 5 percent. It seems likely that the recessions have affected Europeans’ ability to spend 2.5 Euros on a Big Mac far less than they have affected the continent’s ability to purchase an expensive enterprise-software package or a new Chevrolet.
Stepping back to look at the larger picture can be problematic in many ways. There have been several estimates of what percentage of revenues for the entire S&P 500 are derived from Europe, but they all differ in significant ways. Only about half of the 500 companies specifically report how much of their income derives from Europe. One report from Citigroup said that “officially” the percentage would be about 11 percent, although it may be as high as 15 percent. Research from Deutsche Bank put the number much higher, at 17.5 percent.
