Europe Sees Bottom of Downturn as Daimler Leads Rebound

From German luxury carmaker Daimler AG and French builder Vinci SA to International Business Machines Corp. and 3M Co., global companies say the worst is over for Europe.

More than half of the companies in the benchmark Stoxx Europe 600 Index that have reported second-quarter sales so far topped analyst estimates. That’s up from about 40 percent in the prior quarter. While much of that was down to sales growth in North America and Asia, this time the fallout from Europe’s debt crisis didn’t overshadow those gains.

“France is holding up better than we would have thought six months ago,” said Xavier Huillard, chief executive officer of Vinci, Europe’s biggest construction company and operator of toll roads. “Traffic is often a leading indicator, and signs are that we have touched bottom and are recovering.”

The glimmer of optimism from CEOs adds to evidence from economic reports that the region emerges from a record-long recession, largely thanks to a recovery in Germany. European Central Bank President Mario Draghi yesterday said economic indicators signal the euro region is past the worst after euro-area manufacturing unexpectedly expanded in July for the first time in two years.

The region’s automakers, among companies hardest hit by the recession, say that while it may take many years to approach the peak level of sales in 2009, at least it won’t get any worse. The Stoxx 600 Automobiles & Parts Index is the best performing industry group in Europe this year, rising 20 percent.

Hitting Bottom

European figures and sales “appear to show that the market has hit its bottom in the first half,” said PSA Peugeot Citroen (UG) Chief Financial Officer Jean-Baptiste de Chatillon. The French company, the region’s second-biggest automaker, reported a smaller operating loss for the second quarter than analysts estimated, after cost reductions bore fruit.

French car sales rose in July for the first time in almost two years, the country’s carmakers’ association CCFA said yesterday. While the 0.9 percent increase won’t compensate for the first-half slump, and sales this year will probably be the lowest since 1997, “the decline is ending,” the CCFA said.

Daimler, which last year indefinitely postponed a profit target that it originally aimed to achieve in 2010, forecast significant gains in second-half earnings as the western European auto market bottoms out and models such as the new CLA compact four-door coupe and the overhauled S-Class luxury sedan boost demand.

Higher Volumes

U.S. companies are also reporting improvements in Europe after slumping sales in the first quarter.

“We are seeing progress even amidst the sluggish economy,” Goodyear Tire & Rubber Co. Chief Financial Officer Darren Wells said on a conference call this week. “EMEA had higher volumes and year-over-year segment operating income improvement, reversing the trend of the past five quarters.”

3M’s sales excluding acquisitions in western Europe rose in the second quarter after the St. Paul, Minnesota-based maker of products ranging from Scotch tape to dental braces had posted declines since 2011. The sales growth was driven by northern European nations, led by the U.K., that outperformed the southern region, CEO Inge Thulin said on a July 25 conference call with analysts.

“Europe slowed its rate of decline versus last quarter,” IBM CFO Mark Loughridge said on a July 17 earnings call. “We had improvement in the growth rate of several of the major countries. U.K. and Spain not only improved but grew in the quarter.”

Calmer Markets

In the Standard & Poor’s 500 stock index, sales have exceeded forecasts for about 56 percent of the 373 companies that have reported so far in the current earnings cycle. That’s up from about 48 percent in the first quarter. About 73 percent have had positive earnings surprises, the same as the previous quarter.

European companies are also being helped by more stable markets after last year’s speculation that Greece and Italy might be forced to exit the euro. After a bailout for Cyprus in March, investors are confident that governments will do what it takes to keep the euro currency going.

In the year since the ECB’s Draghi made his pledge to defend the euro by buying government debt, borrowing costs for Europe’s highest debt and deficit nations have tumbled without the ECB having to spend a single euro.

Strengthening Euro

Spanish 10-year yields were 4.64 percent in London yesterday, down from a euro-era record 7.75 percent the day before Draghi’s July 26, 2012 speech. Italian 10-year rates dropped more than 2 percentage points in the same period, bolstered by the plan to purchase bonds of nations that request European Union support.

The euro has strengthened 3.8 percent in the past three months, the best performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes, amid signs the region is emerging from its longest-ever recession. The yen rose 1.4 percent and the dollar advanced 3.4 percent.

Draghi yesterday said recent economic indicators signal that the euro region is through the worst and reiterated that officials plan to keep interest rates low for the foreseeable future.

“Confidence indicators have shown some further improvement from low levels and tentatively confirm the expectation of a stabilization in economic activity,” Draghi said after the ECB kept its benchmark rate at 0.5 percent.

Consumer companies and those reliant on government spending are less optimistic. Switzerland’s ABB Ltd. (ABBN), the world’s largest maker of power transformers, said a decline in investment by European governments and utilities weighed on its order intake in the second quarter. Danone SA (BN) of France said it will continue to cut costs in the region, particularly southern Europe, to make up for a continued decline in demand.

“There are some markets where the consumer environment is tough, but also markets where consumer dynamics are strong,” said Diageo CEO Ivan Menezes, as the world’s largest liquor company reported sales growth that beat analyst estimates. “The very destabilizing period is now over.”

(Source: Bloomberg)