Yes, Europe Is Turning

 | Jul 22, 2013 | 7:15 AM EDT  | Comments
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How many companies have to say that Europe has bottomed or has turned up before people realize the turn is occurring? If you were on last week's conference calls, I think the answer would have been obvious: The turn is at hand, and it could be a big one -- so big that it might serve as a substantial reason that the internationally oriented stocks simply aren't coming in.

Because, after last week's calls, they shouldn't. The evidence is that compelling.

At this point, so many people are skeptical about Europe and any prospective turn that it is almost impossible to get through the din of negativity. It is true that, for years, Europe was doing the wrong thing. It raised rates twice; it didn't adopt aggressive easing; and it went for austerity, except when it came to expensive subsidizing of uneconomic renewable energy.

But that's changed. The European Union is now as aggressive as the U.S. Federal Reserve. While austerity is still the theory of the day, there are so many signs of improvement that the easing is clearly trumping the austerity measures. Plus, the borrowing costs have come so far down, and the banking situation is so much improved -- even as we scoff at it -- and the political situation so much more solid, that it is a natural that something good could be happening.

The shock is that the good could be so widespread.

But the skeptics demand more. They think the aggregate data are soft enough to suggest that nothing good is happening. I personally don't give a darn about the aggregate data. It is something for the economists to argue about. Plus, euro-hating is so convenient for the angry right-wing folks in the media that they will be determined to dismiss any turn. That's because these people don't care about trying to help you make money -- this is not top of mind, usually because they have made theirs already.

So, in the interest of empiricism, let's go over what was said about Europe by the big international companies that reported last week.

Let's start with General Electric (GE), which was particularity hard-hit by Europe and has bemoaned it seemingly forever. CEO Jeff Immelt, perhaps one of the gloomiest souls toward Europe said many times on his call that Europe has, and I quote, "stabilized." He said for the first time he sees "signs of life" in Europe, notably in the U.K., France and Northern Europe. The healthcare business, which had become a black hole in Europe, showed the first positive order flow in three years. What was one of the reasons why the stock reacted so positively to the quarter? "We had, obviously, a big improvement in Europe in the orders," across the board.

Honeywell (HON) chief Dave Cote was a tad more circumspect on his call, saying that he is "not ready to declare victory on this one yet." But, he added, "It's been encouraging to see so far." This, from a company big into autos and aerospace and climate controls.

Chuck Bunch, on the other hand, was effusive when he looked at what caused a better-than-expected quarter at PPG Industries (PPG) -- namely, a turn in Europe. "We think we've stabilized, and the comparables should get better" from here. When a skeptical analyst questioned this turn call, particularly when it comes to auto coatings, Bunch said that he is hearing the same things in Europe that he had heard at the bottom in the U.S. -- namely, that the auto build would never come back again and would be at permanently low levels. In the U.S., that was when we were building 9 million cars. We will now more likely hit 16 million. Bunch says Europe is just a little far behind us.

Bunch also said he sees "fairly consistent pace of business in the region and a few of our businesses did achieve volume growth in that region this past quarter." Most important, he saw 8% growth in coatings on the continent, a very big increase.

Ingersoll Rand (IR) has a gigantic automotive and heating-ventilating and air-conditioning business in Europe, and it attributed much of the strength in the quarter to surprising growth in Europe -- so surprising that it sent the stock to the stratosphere. What happened? Here's a sample comment from the call: "I think we have low expectations for Western Europe, and they're better than what we have thought." The company saw "strength," -- their word, not mine -- in climate controls for the first time in ages on the continent.

Perhaps the most effusive industrial was another company that had been held back by Europe: Johnson Controls (JCI). Consider this gem: "Our European automotive business turned profitable" and the company had 4% growth in its building efficiency business, which is said was "a real surprise." The company says it expects to see "good sequential improvement" in its hard-hit auto business, which will make the year finish stronger than expected.

It's not just industrials. VF Corp. (VFC) saw strength for its offerings in a host of European countries, including Germany, Poland, Austria and Switzerland. VF was also very positive on the U.K., making it one of many companies citing strength in that country. The U.K., if you listen to these companies, may be catching up to the U.S. when it comes to growth.

But perhaps the best tale of the turn came from Manpower (MAN) the temporary-employment company with 64% of its business in Europe. This was an amazing European quarter for the company, and I quote: "Revenue exceeded expectations due to modestly improving trends in France, Italy and Spain." This was the first company to talk directly about business improving in Italy, with this quote: "Revenue in Italy was $278 million, which was flat with the prior year in constant currency," and, with that, the company said "We seemed to have hit the bottom in Italy as we have witnessed notable improvements in year-over-year growth trends compared to the 2 last quarters."

Finally, the most encouraging statistic from last week? That would be SAP's (SAP) declaration of a bottom in Spain, where business is now improving in double-digits. Now, you bring in SAP to streamline employment, so you could say that ultimately Spain's 27% unemployment rate isn't going to go down because SAP's business is going up. I think the more important takeaway, though, is that the Spanish companies are actually spending money to bring in SAP. They sure weren't a few quarters ago, when Spain was in free fall. 

Now, what do we do with all of this? I think you can, of course, play European that make sense. You can do it with an ETF like the Vanguard FTSE Europe ETF (VGK), which tracks many of the best companies in Europe and sports about a 3% dividend. It sure hasn't done anything year to date, advancing from $49 to just $51, so I can't blame anyone for wanting to buy that. We are debating buying it for my Action Alerts PLUS charitable trust.

Or you can buy any one of the companies I have mentioned that have seen a turn. I am particularly impressed with what GE has to say, but Ingersoll Rand or Johnson Controls would get the biggest boost from Europe down the road, and they have now become go-to stocks in any decline. I am not a big fan of Manpower because that's a tough business, but it just jumped 11 points, from $54 to $65, in a couple of weeks' time.

The ultimate takeaway, though, isn't so much what to buy because of Europe. It's what not to sell because of Europe. So many companies have had their earnings kept back, and so many had been crimped by Europe, and suddenly that's just not happening anymore. It's a huge turn, and this is a continent with 600 million people, the largest market for China and a gigantic market for the U.S. Sure, China's in decline and, yes, Latin America's just so-so.

But Europe turning? Who'd a'thunk it?

Yet it is undeniable, and you would know it if you'd just listened to all of these calls and heard what the companies with boots on the ground have had to say.

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