By Sinead Carew
NEW YORK (Reuters) – The surging value of the
U.S. dollar may be posing the biggest threat to U.S. corporate earnings
since the 2008 financial crisis, hurting results at most U.S.-based
multinationals. Some on Wall Street are even talking about an earnings
recession.
The dollar’s gain of 22 percent in the past 12 months
against a basket of major currencies has landed a double whammy on U.S.
companies with big sales abroad. Revenue and earnings from foreign
markets are worth less when translated into greenbacks and their costs
become relatively less competitive against rivals producing in countries
with declining currencies.
Dollar moves of this magnitude in the
past have resulted in what Bank of America/Merrill Lynch strategists
term an “earnings recession,” which is generally defined as at least two
successive quarters of declining earnings from the year-earlier
quarters. The brokerage says that a 25 percent gain in the U.S. dollar
in a 12-month period has historically coincided with a 10 percent
decline in the market’s earnings per share.
That hasn’t happened
yet – but the downward trend is clear. Wall Street analysts currently
estimate earnings growth of 1.3 percent for 2015, down from a forecast
of 8.1 percent at the beginning of the year, according to Thomson
Reuters data. The S&P 500’s earnings per share are expected to drop
3.1 percent in the first quarter and 0.7 percent in the second quarter
before recovering modestly in the second-half of the year.
Nearly
one-fifth of S&P 500 companies have warned on earnings for the first
quarter, with at least 49 companies mentioning the effects of the
dollar on results, according to Thomson Reuters.
“This is just the
beginning,” said Richard Bernstein, veteran Wall Street strategist and
now CEO of Richard Bernstein Advisors in New York. “This impact of the
dollar on U.S. earnings could last for three to seven years. It may not
happen every quarter but there’s a secular risk to U.S. earnings,
primarily to multinationals, as the dollar appreciates.”
Expectations
for S&P 500 earnings are expected to keep falling as companies
tally the dollar impact on results in the next few weeks.
Take
chemicals producer DuPont <DD.N>, for example. On Jan. 27, the
company forecast full-year earnings of $ 4.00 to $ 4.20 for 2015 after a
60-cent negative drag from the dollar, based on its level on Jan. 23.
Since
that time, the dollar index <.DXY>, which measures the dollar
against six different major currencies – the euro, yen, pound, Swiss
franc, Swedish krona and Canadian dollar – has gained nearly 3.5
percent. Jefferies analyst Laurence Alexander estimated in a March 11
note that DuPont’s currency hit for 2015 earnings will be an additional 5
to 10 cents. Dupont, whose quarterly results are due on April 21,
declined to comment.
The Federal Reserve on Wednesday lowered its
expectations for U.S. economic growth and inflation over the next two
years in what was widely seen as an acknowledgment that the soaring
dollar has stalled its plan to start raising interest rates.
That
temporarily arrested the dollar’s sharp gains, but many strategists see
the greenback continuing to rally, with Goldman Sachs predicting the
euro will fall more than 10 percent in the next 12 months to $ 0.95 from
$ 1.082 late on Friday.
International revenues account for about
one-third of S&P 500 sales, according to Goldman Sachs data, and
more than 40 percent for technology, materials, energy and industrial
companies.
The dollar’s gains are a boon for rivals in Europe and
elsewhere that have more of their costs in currencies, such as the euro,
that have declined and will get the translation benefits from dollar
sales.
For instance, European aircraft maker Airbus Group NV
<AIR.PA> could eventually see an improvement in margins as it
translates dollar revenues back into euros. Its hedging of sales at a
much lower dollar exchange rate will, though, delay the full impact for
years. The company may also have room to price more competitively to win
major contests against rival Boeing <BA.N>, though it may prefer
to focus on boosting profits rather than increasing market share.
BIG COMPANIES WARN
North
American public companies could give up more than $ 25 billion in
revenues in the first quarter alone, because of currency-related
volatility, said Wolfgang Koester, chief executive of FiREapps, a
foreign exchange data analytics firm in Phoenix, Arizona. The
fourth-quarter effect was about $ 18.66 billion, according to Koester.
Among
those that have warned are technology giant IBM <IBM.N>,
semiconductor maker Intel Corp <INTC.O>, apparel retailer Michael
Kors <KORS.N>, fashion accessories company Fossil Group
<FOSL.O>, and industrial conglomerate Honeywell <HON.N>, all
of which have said results would be hit by currency issues.
Companies
have been rushing to increase their protection against further dollar
strength through increased hedging, though that adds to costs and if
mismanaged can create risks of its own.
“We have seen a huge
increase in the number of our clients that are hedging – they have
doubled or tripled. We have also seen a huge increase in the percentage
of their exposure that they’re hedging,” said David Pierce, director of
business development at GPS Capital Markets, a Salt Lake City-based
corporate FX brokerage firm that helps clients hedge currency exposure.
While
hedging helps multinational companies navigate volatile currency
markets, most don’t hedge 100 percent of their exposure. Also, badly
designed or ill-timed programs can end in disaster, such as in 2008,
when Brazil’s pulp and paper manufacturer Aracruz lost more than $ 2
billion betting that the Brazilian real would continue to gain in value.
Instead, the currency plunged against the dollar.
The dollar’s
strength is a particular problem for companies with exposure to Latin
America. A massive effective devaluation of Venezuela’s bolivar has hurt
companies including tissue and diaper maker Kimberly-Clark Corp
<KMB.N> and Ford Motor Co <F.N>, which have had to sharply
discount the value of their assets in Venezuela. And the weakness of the
real and the Mexican peso will only add to issues in those markets.
Companies
who sell almost all their goods and services within the United might be
the best hiding place against the impact of a strong dollar. A Goldman
Sachs basket of domestic U.S.-focused companies has gained about 22
percent in the last 12 months, compared with a 13 percent rise for the
S&P 500.
Omar Aguilar, chief investment officer of equities
and multi-asset strategies for Charles Schwab Investment Management in
San Francisco, said investors have likely factored in the dollar’s
strength into this quarter’s reports, but they should prepare for more
negative effects over the rest of the year.
“It will have a bigger impact going forward. I expect the impact on third-quarter earnings to be much more dramatic,” he said.
(Reporting
By Sinead Carew; additional reporting by Ryan Vlastelica and Gertrude
Chavez-Dreyfuss in New York and Tim Hepher in Paris; Editing by Linda
Stern, David Gaffen and Martin Howell)
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Police are looking for four suspects who have stolen the cellphones out of subway riders' hands four times in the last five weeks at the same station in Manhattan.
Police say the most recent robbery in the pattern was March 3, when the suspects stole a Samsung Galaxy from a 33-year-old woman at the height of the evening rush. A day earlier, another Samsung Galaxy was stolen from a 38-year-old woman at the station shortly after 10 p.m.
The suspects struck twice on Feb. 10, taking an iPhone 6 from a 40-year-old woman and a Samsung Galaxy from a 48-year-old men. Those victims were robbed three minutes apart.
Anyone with information about the suspects is asked to call Crime Stoppers at 1-800-577-TIPS.
Photo Credit: NBC 4 New York