How to interprete European crisis

McDonald reported that same-store sales fell 1.7 percent in Asia Pacific, the Middle East and Africa in May, the biggest decline since at least 2004. From this number, the second-quarter earnings, scheduled on July 23, analysts expect net income excluding some items is projected to increase less than 1 percent, according to the average of analysts’ estimates compiled by Bloomberg. That would be the weakest quarterly earnings growth in three years. China's slower growth was attributed to MCD's slowdown. It is somehow surprised because MCD had 40% sales in Europe in 2011. But the Asian region contributed more in the drop from May's number.

Let's take a look at a set of data from the WSJ to see how vulnerable companies brace for European debt crisis.

Company                       Total sales in 2011 (B)                  Sales from Europe, %
McDonald's                             $27                                        40%
Carnival                                    15.8                                     38
Goodrich                                   8.1                                       34
Celgene                                     4.8                                       32
Mylan                                        6.1                                       29

The earnings on July 23 will be a clear indicator how the debt crisis affects company earnings. If MCD had 40% sales from Europe but had not suffered the worst from that region, there is enough reason to think the debt crisis had been over-exaggerated by speculators, particularly in the food section, where MCD belongs to.

On the other hand, other companies do plan for the worst in Europe. Common strategies are cash reservation and shrinking exposure. For example, GE had cut cost of $2 billion in that region instead of expansion. In 2012, GE has about 20% revenue from Europe compared to 45% 5 years ago. There are 85,000 workers in Europe, a third of its total work force. GlaxoSmithKline had pulled excessive cash to other regions.

An opposite example is Foot Locker, who has more than two-thirds of its stores in Europe. Fewer customers there are shopping in the athletic store chain. The risk of having more setback from the European crisis is apparent, despite a 30% hike in stock price this year. But the chain store will stick with Europe.

An update today (Sunday, 6/10/2012) of Spain bailout funding may change big economic picture in Europe. ECB had been refused to go qualitative easing method in the past. Once Spain opened an example, others may follow. However, slower growth is undeniable. The above companies are easy targets in terms of revenue in growth perspective.