RISING DOLLAR HITS U.S. CORPORATE EARNINGS / THE FINANCIAL TIMES COMMENT & ANALYSIS

February 3, 2015 8:52 am

Rising dollar hits US corporate earnings

Eric Platt in New York
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©Bloomberg

 

Even Apple, the world’s most valuable company that set a record with its $18bn quarterly profit, has a currency problem.

 

In the fourth quarter, as the company sold nine iPhones a second, the dollar strengthened against virtually all of its trading partners. The cost to Apple: more than $2bn in lost sales and the brief closure of its Russian website as the rouble plummeted. That problem is only going to deepen, executives caution.

 

Dozens of US companies have warned that a sharply stronger dollar has eaten into revenues and crimped profits over the final three months of the year, forcing businesses to cut costs as hedging strategies fail to offset currency fluctuations.

 

Pfizer, United Technologies, Procter & Gamble, Microsoft and Google have been among the long list of multinationals that have blamed the US greenback for lost sales. Currency consultancy FiREapps says the losses could reach $12bn in the fourth quarter, three times the impact seen in the third quarter.

 

The currency swings have had a similar effect to monetary tightening, analysts say, and the difficulty is likely to be exacerbated as the European Central Bank unleashes a new round of bond buying. Bank of America expects full-year earnings forecasts to be clipped as strategists update 2015 foreign exchange and energy prices.

 

“The recent strength in the dollar has put American multinational companies on the back foot when it comes to revenue and earnings guidance for 2015,” says Nicholas Colas, chief market strategist at Convergex. “Moreover, the trend seems to be towards an even stronger dollar.

There’s plenty of talk about the dollar going to par against the euro.”

A stronger dollar has several effects on corporate earnings. For most, sales and profit earned abroad are suddenly worth less as companies translate results in euros, yen and so forth back into the US currency. Further, the cost to manufacture goods within the US has remained steady, forcing executives to either raise prices to protect margins at the loss of some orders, or maintain prices to avoid alienating customers.

At Apple, chief financial officer Luca Maestri says the Japanese yen and Russian rouble proved most costly, although profits were also hit by movements in the euro, and Australian and Canadian dollars. Mr Maestri says year-on-year growth in the company’s fiscal first quarter, which includes the festive shopping season, would have been 4 percentage points, or roughly $2.3bn, higher if currencies were constant.

In the current quarter currency shifts are likely to shave 5 percentage points off Apple’s growth, or $2.3bn. That is more than S&P 500 constituents Mattel, Royal Caribbean, SanDisk and Charles Schwab each generated in revenues in the final three months of 2014.

As “our existing hedges expire, they get replaced by new contracts at current levels, and therefore the protection that is provided to us by our hedging programme diminishes over time”, Mr Maestri said on a call with analysts. “It goes without saying a strong US dollar has a negative impact on our international business.”

Consumer staples behemoth Procter & Gamble, which owns Tide detergent, Crest toothpaste and Bounty paper towels, called the currency swings “unprecedented”, warning it would trim 5 per cent from sales and 12 per cent, or at least $1.4bn, from net earnings this year.

 

Howard Silverblatt, senior index analyst with S&P Dow Jones Indices, says the dollar has been “the excuse of the quarter”, with executives pointing to the currency for lacklustre results. More than two-fifths of S&P 500 sales are generated abroad, with the technology, energy and industrials sectors realising more than half of revenues outside of the US.

For the fourth quarter, earnings per share for the blue-chip index are expected to climb 6.4 per cent from a year earlier, marginally below forecasts at the start of December, according to S&P Dow Jones Indices. However, full-year 2015 forecasts have been trimmed drastically as the dollar soared and oil prices cratered. Analysts now predict S&P 500 earnings will rise 2.7 per cent in the current year, including a contraction in the first quarter, down from forecasts for as much as 12.3 per cent in October.

Each 10 per cent increase in the dollar against its trade-weighted peers will reduce S&P 500 earnings by about $3, Goldman Sachs notes. While bottom-up earnings estimates have been cut to roughly $120 per share for the index, most strategists on Wall Street still have a rosier view, indicating downgrades could be on the horizon.

“The impact of currency is all investors want to talk about following disappointing guidance by companies,” Amanda Sneider, a strategist with Goldman Sachs, says. “Investors appear willing to largely move past the translational impact of currency but remain concerned by the transactional impact.”