International prospects have been a huge factor for investors lately. But with Asian growth being cut, it raises concerns that the Pacific gravy train won’t last forever. What about the Euro-zone? Is expansion there viable? Or is it all doomed for years to come?
The Euro-zone’s contraction-stage business cycle isn’t going to be pumping out growth numbers like China any time soon. But identifying potential before others is the reason we invest. Basically, companies investing in Europe may see bigger profits than their competitors in the coming years.
And no, you don’t have to go on a Lord of the Rings quest to find companies with future growth potential in Europe. In fact, some of the most popular stocks today are the ones that are rarely considered for their Euro-zone prospects.
European expansion
But international success hasn’t helped profit margins (which have dropped from about 9% to 2.8% recently). Even still, overseas investments brought in a ton of money that now accounts for about a quarter of its revenue. That’s a really big deal for a company whose primary operations are in North America.
Despite the expansion, Netflix, Inc. (NASDAQ:NFLX) still only carries a debt to equity ratio of 0.86 and is ready for even more expansion. But bears claim that media licensing is expensive and the stock is priced sky high. Its PEG ratio of 8 tells us that many have already jumped on the Netflix bandwagon. Still, expansion in Europe could balance the scales.
Tip-toeing in Europe
While Chipotle Mexican Grill, Inc. (NYSE:CMG) deals with Tex-Mex, (casual American dining), a lot of the same rules still apply. Chipotle is almost fully vested in domestic operations, but is dropping hints that it’s pressing for growth in Europe.
But the company’s international growth appears to have stalled in recent quarters. Chipotle Mexican Grill, Inc. (NYSE:CMG) seemed to be twiddling its thumbs on international expansion and for good reason. Perhaps management recalls when Yum! Brands, Inc. (NYSE:YUM) failed with its launch of Taco Bell in Europe during the 1990s.
But with an under-capitalized European market, solid profit margins, and literally no debt, Chipotle Mexican Grill, Inc. (NYSE:CMG) has the means to expand. Same-store sales in America are slowing so international expansion could be key. Putting restaurants in Europe could open the door to many exciting opportunities.
A shining example
Yelp Inc (NYSE:YELP), the social consumer app, has already implemented a stellar business plan for expansion in Europe. The company continues to leverage an increasingly popular service (socially-informed shopping) with an increasingly popular platform (mobile). With everything working, there’s no reason for it to stop expanding, even with its current negative profit margins.
Regarding Europe, Yelp Inc (NYSE:YELP) didn’t test the waters, it jumped straight in. It even went so far as to buy out a similar company, Qype, after it became popular. The $24 million dollar purchase wasn’t financed by debt and the company has potential for more investments given its huge current ratio of 8.6.
As Yelp Inc (NYSE:YELP) moves into positive earnings territory next year and Netflix, Inc. (NASDAQ:NFLX) sees a huge influx of international business, you might wonder why Chipotle Mexican Grill, Inc. (NYSE:CMG) made this list. But the company recently said that it would be ramping up operations in London, I consider this a great sign of things to come.
Underrated, still?
There are many U.S. companies looking to Europe, so this list is hardly all inclusive. But finding solid businesses, that balance cautious capital allocation with aggressive expansion, are hard to come by. Chipotle Mexican Grill, Inc. (NYSE:CMG), Netflix, Inc. (NASDAQ:NFLX), and Yelp Inc (NYSE:YELP) seem to have found the right recipe for branching out into an ailing region. Perhaps it’s time you took a look at their prospects to see what all the fuss is about.
Ryan Gilbert has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and Netflix. The Motley Fool owns shares of Chipotle Mexican Grill and Netflix.
The article Is Europe the Next Big Bet? originally appeared on Fool.com.
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