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A Recovery in Europe Will Lead These Stocks Higher

May 15, 2014 | About:
Vinay Singh

Vinay Singh

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The European economic crisis could be coming to an end. Economic data out of Europe suggested that the continent’s economy is improving. Meanwhile, the UK is also showing signs of life.

If — at long last — the European economic situation is turning around, some major stocks could be poised to benefit. In particular, shares of McDonald’s (MCD), Mondelez (MDLZ) and Ford (F) could outperform.

Is Europe Rebounding?

French manufacturing output hit its highest level since 2011 recently. At the same time, Germany’s flash PMI report came in better than expected, indicating that German manufacturing is rebounding. Spain’s GDP continues to shrink, but not as badly as economists had expected. Spain’s GDP declined just 0.1% in the second quarter, far less than the 0.5% drop in the prior quarter. As for the UK, a report recently showed that retail sales rose 0.2%, suggesting that UK consumers are more willing to spend.

McDonald’s Has a Lot of European Exposure

Fast food giant McDonald’s is heavily exposed to Europe. In fact, Europe accounts for about 39% of McDonald’s revenue, 7% more than the U.S.

McDonald’s shares slumped recently after the company turned in a disappointing quarter. Europe was partially to blame, as comparable sales declined 0.1%. Still, McDonald’s European performance was better than its performance in Asia — comparable sales declined 0.3% in that region.

McDonald’s CEO Don Thompson wasn't ready to declare a European recovery just yet. On the company’s earnings call, he said that (based on his observations) the notion of a European economic recovery was premature. Overall, he continued to characterize Europe as a “big challenge.”

But regardless of Thompson’s views, given McDonald’s big European exposure, a European recovery would certainly benefit the fast food giant.

Mondelez Gets 39% of Its Revenue from Europe

Europe is by far Mondelez’s biggest market. It accounts for about 39% of the company’s revenue, nearly twice as much as all of North America.

When the company reported earnings, it characterized the European environment as “difficult.” Net revenue dropped 1%, while operating income fell 4.7%. The company blamed the results partially on the price of coffee.

Nevertheless, Europe remains a major market for Mondelez, and though its products — as foods — are not subject to significant demand swings, a stronger European economy should benefit the company.

Still, Mondelez can't be played based on Europe alone. Activist investor Nelson Peltz has a big stake, and he wants the company sold to PepsiCo. Peltz’s activity could ultimately do more for shares in the short-run than a European recovery.

Europe Has Weighed on Ford

Ford’s European division has hit shareholders hard over the last few years. This year alone, Ford expects Europe to cost the company $2 billion. To counteract the effect of European decline, Ford has been restructuring its European operation, closing plants and negotiating with local unions.

Still, Ford is the second best-selling brand in 19 European markets. In 2012, it sold over 1.3 million vehicles in the European market, about half of the 2.3 million it sold in the US.

Ford is planning for a tepid European economy. But if that isn’t the case, if the European economy unexpectedly turns around, it lessens Ford’s bleeding in Europe and benefits the U.S. automaker.

Investing for a European Recovery

Of course, as McDonald’s Thompson said, calling for a European recovery may be a bit premature. In particular, the economies of Spain and Italy continue to struggle, and youth unemployment remains dangerously high.

But if Europe has made it through the worst, if things are finally starting to turn around, these companies could benefit. McDonald’s, Mondelez and Ford all derive significant portions of the revenue from Europe. A stronger European economy could certainly benefit its shareholders.


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