U.S. Firms -- and Their Shares -- Reap Benefits of Europe's Revival

A strengthening eurozone economy has drawn global investors back to the Continent, pushing up the region's stocks and common currency.

Now, U.S. companies tied to the bloc are benefiting, too.

Many investors started 2017 expecting U.S. companies focused on the American economy to trump their international peers. But eurozone growth has outpaced that of the U.S. this year, and U.S. firms with exposure to Europe have started to profit from the region's brightening outlook.

It is a trend many analysts expect to continue.

U.S. stocks closely tied to the European economy have outperformed those with looser connections to Europe this year, according to an analysis by equity strategists at UBS who track a basket of stocks with elevated European exposure.

Early signs of a pickup in Europe's economy are creeping into U.S. earnings. The number of companies in the Dow Jones Industrial Average companies reporting quarterly sales growth in Europe is the highest since 2014, according to FactSet.

"A healthier, stronger-growing European economy will benefit U.S. companies that are exposed to that," particularly exporters with end markets in the Continent, said Christopher Dyer, director of global equity at Eaton Vance.

The eurozone economy grew at an annualized rate of 2.3% in the first three months of 2017, its fastest rate in two years. That compares with a rate of 1.2% in the U.S., although many economists predict faster growth in subsequent quarters. Business surveys and industrial-production figures suggest that quicker pace of growth in Europe has continued into the second quarter.

Political risks in Europe, associated with a string of elections, were expected to damp growth and consumer confidence. That didn't happen.

Meanwhile, hopes for tax cuts in the U.S. have dimmed, which has put a dent in smaller stocks more reliant on the U.S. market.

The primary beneficiaries of a stronger Europe are eurozone equities, with shares climbing around 10% this year amid 11 consecutive weeks of investor inflows.

Allocation to eurozone stocks remains near two-year highs, according to fund managers surveyed by Bank of America Merrill Lynch, as investors continue to bet on sustained strength in the region's growth and inflation outlook.

But a broad list of U.S. companies, including those involved in software and services, household and personal products and pharmaceuticals, also benefit from greater ties to Europe, said Julian Emanuel, strategist at UBS.

While many investors have tried to capitalize on European growth by sending money directly into European equities, some might not want to take on the currency risk, Mr. Emanuel said. Those investors might prefer companies they're more familiar with, he said. As well, many of the companies most tied to Europe are household names that also stand to benefit from any potential tax-repatriation policy.

It can be difficult to calculate eurozone sales because of the different ways companies report, but shares of some companies with heavy European exposure are already taking off.

Shares of online travel company Priceline Group, which generates 76% of revenues from Europe, according to FactSet, are up around 23% so far this year. Shares of tobacco giant Philip Morris International Inc., which gets 42% of revenues from Europe, are up 32%. That compares with a 9% rise for the S&P 500 so far this year.

U.S. companies also could potentially benefit from higher business expenditures in Europe -- not just more consumer spending.

European companies tend to invest in productivity as the economy improves, said Michael Thompson, managing director at S&P Global Market Intelligence. "A lot of European companies are very focused on improving margins," Mr. Thompson said. "Margin improvement in Europe is code for 'tech buy.'"

Companies based in the U.S. with global operations have broadly outperformed domestically focused U.S. firms in the first quarter, partly because of a pickup in emerging markets and a weaker dollar. The Commerce Department said that what it calls rest-of-the-world profits rose 25% in the first quarter from a year earlier, significantly outpacing those generated in the U.S.

"Companies with exposure to the international consumer have outperformed, and I don't see any reason for a slowdown," said Melda Mergen, head of equities at Columbia Threadneedle Investments.

Write to Riva Gold at riva.gold@wsj.com

(END) Dow Jones Newswires

June 16, 2017 05:44 ET (09:44 GMT)