Shares of companies such as Carrefour, Heineken and Pernod Ricard, which have a significant exposure to the euro zone, are in the crosshairs of short sellers, who expect a wave of profit warnings before the second-quarter earnings season.
Last Tuesday, Danone - a stalwart of the French CAC 40 index and a defensive safe haven for investors since Europe's debt crisis started in late 2009 - unexpectedly cut its profit margin forecast.
Danone blamed a drop in consumer spending in Spain, where nearly one in four are unemployed, which prompted the maker of Actimel and Activia yoghurts and Evian water to cut prices.
Following the warning, a number of short sellers - who profit from falling stock prices by borrowing shares, selling them, then buying them back more cheaply - are positioning themselves to make a buck out of the deteriorating trend in the consumer-related sectors.
"Profit warnings usually come in a bunch, so with Danone's warning, there's blood in the water," said Derek Lawless, head of ETX Capital France.
According to Markit, which provides securities lending data, short interest in Pernod has risen over the past week, with 4.2 percent of the company's shares out on loan, up from an average of about 2.5 percent over the past few months.
Short interest in Heineken remains relatively low, at 1.1 percent of the company's shares out on loan, but data shows it has also risen over the past week.
U.S. WARNINGS
Exposure to the ailing Spanish economy is becoming the Achilles' heel of food and beverage giants. The Organisation for Economic Co-operation and Development forecasts a 1.5 percent drop in Spain's economic output in 2012, much worse than the 0.1 percent contraction expected for the euro zone overall.
"Europe is stuck in an austerity trap, and it has a knock-on effect on consumer spending. There's no confidence in the economy, so people are not spending," ETX Capital's Lawless said.
Danone's warning, which sent its stock plunging 10 percent to a near-five month low, was echoed a day later by a similar warning from U.S. giant Procter & Gamble Co.
The world's top household-products maker cut its growth forecasts for a second time in two months as it struggles with slowing demand in Western Europe, the United States and China. Its stock has since lost nearly 5 percent.
Other U.S. bellwethers, including PepsiCo Inc, FedEx Corp and Philip Morris, also lowered earnings expectations recently, citing concerns about Europe.
SCOPE FOR DISAPPOINTMENT
Traders said pricey valuation levels in the consumer staples sector, which has been seen as resilient to Europe's economic downturn, also makes the case for short-selling strategies.
"The second quarter is a nightmare for all the consumer companies active in Europe. Trading is decelerating both in Spain and Italy but also in France, while Germany is not immune," a Paris-based trader said.
"I believe that the entire sector needs to be rebased both in terms of earnings forecast and in terms of multiples. That brings a lot of short opportunities, and Carrefour, Pernod and Heineken are obviously good candidates."
Europe's food and beverage sector index, which includes Nestle, Unilever, Danone and Heineken, currently trades at an average 14 times expected earnings, well above a price-to-earnings (P/E) ratio of 9.6 for Europe's broad STOXX 600 index, according to Thomson Reuters Datastream.
With data showing a deterioration in the euro zone's earnings momentum - analysts' upgrades minus downgrades over the past three months as a percentage of total estimates - there is scope for further disappointment on the earnings front, particularly from Spain, where the momentum is a steep -12.5 percent, according to Datastream.
Thomson Reuters StarMine data, which compares the forecasts of the top analysts with the broad consensus, predicts Carrefour will miss consensus profit forecast for fiscal 2012 by 2.9 percent, while Pernod is seen missing the consensus forecasts for 2012 by 0.3 percent, and Danone by 1.8 percent.
source: nytimes.com
