Go Global Without Leaving Home
Amid concerns about a global recession and losses on currency translation, it is easy to forget that just a year ago companies with big international exposures were cool.
Everybody wanted to be global, because the growth was overseas. While international operations have lost some of their cache in recent quarters, the growth picture remains attractive. Individual foreign stocks can be risky and difficult to analyze. However, investors can back-door their way into overseas exposure through U.S. multinationals.
U.S. companies’ foreign sales have grown more than twice as fast as U.S. sales in recent years. While the economic slowdown has impacted all regions of the globe, the rest of the world’s economy continues to expand faster than the U.S.
While the U.S. managed economic growth of less than 1.5% last year and Japan’s economy shrank, the gross domestic product of the world rose roughly 3.2%, and 6.3% excluding the U.S., Western Europe, and Japan.
Data for the last fiscal year probably understates the true importance of U.S. companies’ foreign operations because of massive losses on currency translation. The dollar strengthened against most major currencies in the second half of 2008. Currency losses are a real cost on the income statement, but growth numbers that include such losses can understate the true operating momentum of foreign businesses. Multinationals’ operating results for the March and June quarters could face continued currency headwinds.
Currency troubles or not, several multinationals have compelling overseas growth stories. In the table below, we list 19 monitored stocks that enjoy solid revenue growth in foreign countries. Three favorites are reviewed below.
As oil prices soared, Exxon Mobil ($67; XOM) was generous with its shareholders, returning $115 billion through share repurchases over the last four years. Now, with a barrel of oil costing just $49, 66% off its July 2008 peak, the company is more conservative with its cash. Share buybacks are likely to slow, and the company says it plans to become much pickier about acquisitions. Still, with more than $32 billion ($6.43 per share) in cash and equivalents on its balance sheet, Exxon isn’t afraid to spend some money.
The company announced that it would shell out $29 billion on exploration and production this year and an average of $27.5 billion annually for 2010 to 2013. Exxon may be the only oil major to ramp up spending on production this year. Chevron ($66; CVX), BP ($43; BP), and ConocoPhillips ($41; COP) have projected flat or declining expenditures. Many other exploration companies and refiners also plan to cut spending.
Exxon’s strategy could pay off when prices increase. The company is already well ahead of the other oil majors in oil reserves and production, and its strong capital-spending program should widen the gap. Last year, the company replaced 136% of its production, and Exxon boasts the lowest finding and development costs of any oil major — an average of $1.34 per barrel over the last three years. Exxon is a Long-Term Buy.
The rollout of China’s 3-G cell-phone network offers huge potential for Qualcomm ($42; QCOM). Third-generation networks offer higher download speeds for phones that browse the Internet and download songs and movies. With only a hint of a 3-G network currently in place, the Chinese government decided to provide $40 billion to telecom companies to develop network infrastructure.
As the infrastructure translates to cell-phone purchases, Qualcomm is likely to be a major player, selling its microchips to mobile-phone makers. In addition to China, the company has exposure to other emerging markets that leave it well-positioned to capitalize on worldwide mobile-phone growth over the next several years.
Qualcomm will pay $891 million over four years to settle a long-running patent dispute with Broadcom ($23; BRCM) and preserve a business model that generates 90% of licensing revenue from patent royalties. The settlement resulted in a $748 million pretax charge in the March quarter, leading to a loss of $0.18 per share, versus a $0.47 profit in the year-earlier period. Excluding the charge, operating income fell 9% on a 6% decline in sales. Looking ahead, Qualcomm cited strong demand for wireless telecommunications chips in emerging markets, raising sales guidance for fiscal 2009 ending September. Qualcomm is a Long-Term Buy.
While currency losses hurt Stryker ($38; SYK) in the March quarter, the company’s international sales have helped it weather the sharp U.S. economic downturn. Stryker CEO Stephen MacMillan said that endoscopy and medical sales were off in the U.S., but the business units managed double-digit growth overseas.
At home, the company has faced a slowdown in hospitals’ spending on medical equipment. Demand for orthopedic implants has slowed as patients put off surgery, though the business continues to grow. Still, Stryker believes it is seeing signs of a bottom and that hospitals are starting to pick up their spending. Even if hospital cash outlays remain under pressure for another year or so, the company should still see modest growth in its orthopedics business (59% of 2008 sales). Such implants have shown decent resilience in the face of the economic slowdown — sales rose nearly 9% in constant currency last year and 6% in the March quarter.
A U.S. Food and Drug Administration panel last month rejected Stryker’s application for a bone-growth compound, but the company launched at least three new products in the March quarter. Consensus estimates project 5% growth in per-share profits this year. Stryker is a Buy and a Long-Term Buy.