Analysis: Europe no longer the bane of U.S. corporate profits

Thu Dec 12, 2013 1:15am EST
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By Caroline Valetkevitch

NEW YORK (Reuters) - Europe, long a scapegoat for weak earnings at U.S. multinational companies, is now looking like a more dependable source of profits, and that could make some stocks that have lagged this year's rally more enticing to investors.

Big players in the technology sector, which has the highest exposure to Europe, are among those best positioned for a boost to the bottom line from the region's gradual recovery.

On a price-to-earnings basis, tech as a group is nearly 8 percent cheaper than the benchmark S&P 500 index, now at its most expensive since late 2008, suggesting some tech stocks may have room to catch up.

Tech names with some of the highest exposure to Europe, based on Bank of America Merrill Lynch data, have mostly underperformed this year. IBM (IBM.N: Quote) is down 8.5 percent on the year, while Oracle (ORCL.N: Quote), is up just 3.7 percent. Both derive at least 32 percent of their sales from Europe. Meanwhile the S&P 500 .SPX is up 25 percent.

Energy, which also has high exposure to Europe, lags the S&P 500's gains as well.

The euro zone, a source of weak sales for S&P 500 companies for several quarters, emerged from its recession earlier this year. If its recovery persists, the region could help U.S. earnings get off their own path of lackluster growth.

"It's important for investors to realize Europe doesn't have to be a hole anymore in earnings," said Joseph Quinlan, managing director and chief market strategist at U.S. Trust, Bank of America Private Wealth Management in New York. "Even a little growth in Europe is going to go a long way to help boost the profitability of U.S. multinationals."

To be sure, a rebound in Europe is expected to be slow and spotty, much like the U.S. recovery, and many argue optimism about the improvement is premature.   Continued...

The company logo of the Bank of America and Merrill Lynch is displayed at its office in Hong Kong March 8, 2013. REUTERS/Bobby Yip