Companies Seeking Growth Abroad Could Have Found It At Home.

We are seeing a pattern in Q2 among S&P 500 companies where companies with the majority of their revenues coming from the United States are experiencing higher EPS growth and revenue growth than those companies with a more international focus.

As the United States economy struggles with elevated unemployment and slow GDP growth, companies in the S&P 500 index continue to invest in international operations in search of new growth opportunities. With many emerging markets undergoing rapid economic development, it makes sense for companies to want exposure there for the long term. In the nearer term, however, international markets do not appear to be the reliable source of growth that has been anticipated.

The Chinese economy, which as recently as 2010 was growing in excess of 10% per year, is now growing at a much slower 7.5% rate. While 7.5% is still an impressive growth rate, especially for an economy that large, it is significantly lower than what had been expected when many companies began investing in China. In Europe, many countries continue to struggle with recession or slow growth and very high unemployment, depressing consumer spending.

Difficulties in foreign markets have made the United States begin to look more attractive, and domestic business is now driving earnings results. To quantify this, we compiled geographic revenue data to determine the percentage of revenue each company earns from the United States. Then the companies were placed into three groups: those with more than 50% of revenue coming from the United States, those with less than 50% of revenue coming from the United States, and those that do not disclose revenue on a geographic basis.

As seen above in Exhibit 1, companies with half or more of their revenues coming from the United States are seeing earnings grow by 7.6% this quarter, while the more internationally focused companies are seeing an earnings decline of 4.9%. Companies that do not disclose the geographic origin of their sales are growing revenues by 17.7%. The undisclosed group contains many companies that are strictly domestic, like regional utilities and retail chains. Many of these companies do not break out revenues by country because 100% of their revenues are derived from the United States. Similar to the earnings pattern, the revenue growth data exhibits the pattern of higher growth for the U.S.-focused companies than for the internationally focused companies.

On a sector basis, the pattern holds true for the most part, with the exception of the consumer discretionary and utilities sectors, as shown above in Exhibit 2. The consumer discretionary sector is primarily U.S.-focused, with 42 of the companies earning >50% of revenues in the United States and only 12 companies receiving most of their growth from abroad. Of the internationally focused companies in the sector, earnings growth is boosted by Expedia Incorporated (EXPE.O) and Priceline.com Incorporated (PCLN.O), which have had success penetrating the European travel market. In utilities, there is only one company with an international focus, and most of the remaining companies are expected to show weak earnings growth.

Looking ahead, analysts expect U.S.-focused companies to continue to outperform on the earnings front. As shown above in Exhibit 3, estimated growth rates for these companies are consistently higher than those for the internationally focused companies throughout the rest of the year.