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By Jason Stipp and Heather Brilliant, CFA | 11-01-2012 12:00 PM

Don't Overpay for Foreign Exposure

Morningstar's Heather Brilliant says better revenue opportunities exist in the U.S. now than in foreign markets, and investors should demand discounts for firms with large non-U.S. sales footprints.

Jason Stipp: I'm Jason Stipp for Morningstar. We're well into third-quarter earnings season and a few interesting trends have emerged but what devaluations look like? We're checking in today with Morningstar global director of equity research Heather Brilliant to get some insights on how stocks are priced.

Thanks for joining me, Heather.

Heather Brilliant: Thanks for having me, Jason.

Stipp: We've noticed a few things about earnings so far. I did a video with Bob Johnson, our director of economic analysis, and he talked a lot about some decoupling that he's seeing between U.S.-focused businesses and businesses that have international exposure. International exposure has meant weakness in a number of areas, including currency effects for some companies, and U.S. exposure they've held up a little bit better. So, I'm wondering, how are the valuations looking? Are the U.S.-focused companies priced as if they are doing a little bit better, and how about the international exposure? I know this is hard to get a handle on, but what have you found when you look at that?

Brilliant: So, when we took a look at the data, we were actually surprised to find that companies with more of their revenue coming from outside North America are trading at a slight premium to companies where their revenue primarily comes from within North America. And this data is actually really hard to come by. So we had to compile our own database of where the revenue is coming from for all the companies that we cover and try to analyze it, so we could get a sense of where the valuations come out. And we found that the companies focused outside of North America from a revenue perspective are trading at about 96% of fair value versus about 93% for those focused within North America.

Stipp: It's possible if you're looking for individual opportunities, you may find that this could be a factor at a company-by-company level perhaps. What are you looking at when you are trying to get a handle on whether a certain discount for international exposure is enough to consider a company that has a lot of overseas sales?

Brilliant: I think right now we see a lot more opportunity within the U.S. economy. So, personally what I have been saying is that we really would like to find companies that are highly exposed outside the U.S. to be trading at a little bit more of a discount than ones that are more exposed to the U.S. when we're trying to make that final investment decision or recommendation. So, that's really where we've come out on it. If a company is highly exposed to Europe, we'd rather be more confident in where its future prospects are going as opposed to a company that might be more exposed to the U.S.

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