U.S. Companies Face Slowing Growth as European Crisis Impacts Global Sales

Profits at U.S. corporations grew the least in two years in 2011 as economic growth at home was countered by a European slump that that hurt companies’ global sales.

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“Slowing global growth, some impairment of export activity to Europe and perhaps even the rise of the dollar collectively have begun to sort of work against the multinational story,” said Mark Luschini, chief investment strategist at Janney Montgomery Scott LLC in Philadelphia, who said he will invest more in the U.S. to avoid international risk.

The U.S. jobless rate declined in the final four months of 2011, while the unemployment rate in the European Union increased to 10.3 percent of the working population in November, a 13-year high and up from 10 percent at the end of 2010. The U.S. economy is projected to grow 2.1 percent in 2012, while the EU’s economy is expected to contract by 0.2 percent, which would make for its second slowdown in four years. China’s growth is expected to slow to 8.5 percent, the lowest in 11 years.

While Luschini is “optimistic that the economic activity in the U.S. is firming to the point that it’s durable,” overseas demand that propelled U.S. profits a year ago has already begun to fall off as European nations trim budgets to deal with their debt crisis and a slowdown in China hurts commodity-tied developing nations.

Companies like Alcoa (NYSE:AA), the largest producer of aluminum in the U.S., could see important sources of revenue dry up as nations and companies abroad cut back on spending.

“There’s going to be a big dichotomy between U.S. exporters and domestic-focused U.S. companies,” said Jacques Porta, a fund manager at Ofi Patrimoine in Paris.

What might otherwise be a boom in the U.S. will instead be restrained growth, as U.S. growth will boost profits for companies that get almost all of their revenue from home while companies that depend on foreign markets at least partially offset that growth with their own declines.

Apple (APPL) is expected to report net income rose 56 percent to about $9.35 billion in the fourth quarter, slightly higher than earnings growth of 54 percent in the previous quarter. Meanwhile, Alcoa, which relies on markets outside the U.S. for about half of its revenue, will likely report a decline in profits today, with analysts predicting a 1 percent loss after aluminum prices fell 18 percent in 2011, forcing the company to close 12 percent of its smelting capacity.

IBM (NYSE:IBM), which does the majority of its business overseas, is expected to report a 4.9 percent increase in net income for the fourth quarter after reporting third-quarter earnings growth of 7 percent and second-quarter growth 8.2 percent. The European slump may also hit Cisco (NASDAQ:CSCO), which earns roughly one-fifth of its revenue in the region. CEO John Chambers said in November that order growth in Europe was expected to slow to the mid-single digits, down from double-digit growth in recent quarters.

The S&P 500 lost 0.04 points in 2011, the smallest annual change since 1947, while the Stoxx Europe 600 Index fell 11 percent and the MSCI Asia Pacific Index fell 17 percent. Fourth-quarter earnings per share for Stoxx Europe 600 companies probably declined 21 percent for the year, while projected 6 percent growth for S&P 500 earnings would be down from 14 percent growth in the third quarter and 33 percent in the fourth quarter of 2010.

S&P 500 growth is expected to be 6.4 percent this year, excluding financial companies, as Europe’s debt crisis continues to drag on earnings at U.S. banks, including JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS), as companies shelved initial public offerings and plans to raise capital. The S&P 500 Financials Index declined 18 percent in 2011, making it the worst of 10 industries tracked within the S&P 500.

Higher oil prices drove earnings in 2011 for energy companies such as Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), but that could change as production picks up and European demand declines, pushing down prices.

Automakers will do well in the U.S., where sales continue to recover, but Western European sales are projected to fall 6.5 percent to 13.3 million units in 2012. General Motors (NYSE:GM), Ford (NYSE:F), and Chrysler finished 2011 stronger than analysts predicted, as annual U.S. auto sales reached 12.8 million in the best year since 2008, with GM reclaiming the top spot in world vehicle sales from Toyota (NYSE:TM).

Results will be a mixed bag when global companies like Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), McDonald’s Corp. (NYSE:MCD), United Continental Holdings Inc. (NYSE:UAL), and Delta Air Lines Inc. (NYSE:DAL) report earnings this month, with the those most dependent upon foreign business taking the biggest hit to revenue. But that is not to say 2012 won’t be a profitable year, as in many cases growth at home may be enough to offset slumping sales overseas.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com