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US earnings hit from strong dollar sparks worry
[NEW YORK] Earnings Tuesday from American multinationals revealed a downside to the comparatively robust US economy: the drag from a rising dollar.
Dow component Procter & Gamble cited "unprecedented" foreign-exchange fluctuations as it missed earnings expectations and slashed its profit outlook.
Chemical producer DuPont and technology giant Microsoft also highlighted the strong greenback as a headwind for earnings, adding to commentary last week from fast-food chain McDonald's and consumer goods firm Kimberly-Clark.
The meager results were the main catalyst of the stock market's sell-off Tuesday, which pared nearly 300 points from the Dow.
"What it says is US companies are not immune to global weakness," said Christine Short, senior vice president at Estimize, a financial tech company that collects earnings research.
Foreign exchange "is going to be a big impact," she added.
The dollar has been on a tear in the wake of mostly improving data on US jobs and economic growth. That has lifted expectations that the US Federal Reserve, which concludes a two-day policy meeting Wednesday, will raise interest rates before other major central banks.
A strong dollar has upside for US companies that import goods or raw materials from weak-currency economies and sell the goods in the US. Analysts have said some sectors could benefit from this differential, such as clothing retailers.
However many US multinationals face challenges due to a strong dollar, which last week hit an 11-year high against the euro, which itself has jumped against the battered Russian ruble.
The strong dollar can sting multinationals if they import goods or materials from the US or other strong-currency markets into a weak-currency state like Russia if prices to consumers are not adjusted.
Companies also suffer when overall earnings are transposed from weak currency markets like Russia back into dollars for reporting purposes.
In P&G's case, the grim commentary on foreign exchange also reflected a negative impact from Switzerland. P&G's European headquarters is Geneva, which means it also has exposure to the Swiss franc, which has risen sharply following an unexpected move by the Swiss central bank earlier this month to abandon the franc's cap against the euro.
P&G projected 2015 earnings would be hit by 12 per cent, or at least US$1.4 billion, due to currency effects.
"This is the most significant fiscal-year currency impact we have every incurred," P&G chief financial officer Jon Moeller said in a conference call with analysts.
Kimberly-Clark, another leading consumer products company, last week announced a US$462 million charge in Venezuela stemming from the revaluation of its assets due to the plummeting value of bolivar.
Kimberly-Clark chief executive Tom Falk predicted a negative currency earnings hit of more than 15 per cent in 2015.
At McDonald's, weak currencies in Russia and Ukraine battered earnings in 2014 and the company expects more of the same in 2015 in those countries and others.
The fast-food giant forecasts a full-year impact of 35-40 cents per share in 2015, said McDonald's chief financial officer Pete Bensen.
To offset the impact of the strong dollar, US companies are seeking to raise prices in badly hit markets.
"Generally, the principle is that over time you recover the amount of the price effect," P&G's Moeller told reporters in a conference call.
That means if a good is in a market where the dollar has appreciated 20 per cent, the price of the good to consumers will also increase by 20 per cent, but the jump may not happen all once, Moeller said.
Other steps include boosting local sourcing of goods and materials in Russia, Venezuela and other hard-hit markets, he said.
However, company officials acknowledged that price increases are difficult in some cases, such as when the economy is weak, as with Eastern Europe.
"This is just a bit of unchartered territory," Kimberly-Clark's Falk said. "If the Russians and some of the other Eastern European economies declined by mid-single digits, which is what some of the forecasters say, we'll see how that plays out in terms of consumer purchasing power."