By Alexandra Scaggs
First-quarter earnings of U.S. companies are revealing a notable
gap between sales and profits, leading some to point their fingers
at the strength of the U.S. dollar as the culprit.
This earnings season, 56% of Standard & Poor's 500 companies
reporting so far have missed their revenue projections for the
first quarter. During the first three months of 2013, the ICE U.S.
Dollar Index, which tracks the dollar's value against a basket of
global currencies, logged a 4% gain.
Substantial gains in the dollar can cut into companies'
revenues, because every unit of currency earned abroad will be
worth less when reported in U.S. dollars. S&P Dow Jones Indices
found that 46% of revenues came from abroad in 2011--the most
recent year measured--for the 252 companies in the S&P 500 that
reported sales by region.
Strategists differ over the dollar's precise impact.
Thomas Lee, U.S. equity strategist at J.P. Morgan Chase &
Co., estimates that 40% to 45% of S&P 500 companies' total
revenues are made outside the U.S. In a recent note, he said the
dollar's strength could cut overall revenues in the S&P 500 by
2% to 3%.
However, Barry Knapp U.S. equity strategist with Barclays, says
the likely impact of the stronger dollar has been to reduce
revenues by 1%.
The stronger dollar has "had an effect, but only on the margin,"
said Mr. Knapp. "Coming into this year, I don't think any
[analysts] would have built all this in" to their models, he
added.
Among the companies taking a hit from the stronger dollar, 3M
Co. (MMM) said in its earnings release that currency movements cut
into its sales by 1.8%. The company also reduced its full-year
outlook, citing the strength of the dollar alongside slowing
demand. Its shares fell 2.5% Thursday, after it reported
earnings.
"Considering the stronger U.S. dollar and softer demand in some
end markets, it is prudent to alter our outlook a bit for 2013," 3M
Chief Executive Inge Thulin said in its earnings release.
Companies that sell goods in Venezuela represent an extreme
example of the dollar's toll on the bottom line.
Tupperware Brands Corp.'s (TUP) shares fell 4.1% after it
released its earnings report. Tupperware cut its full-year earnings
outlook, citing the 32% devaluation of the Venezuelan bolivar, as
well as other currency effects.
Colgate-Palmolive Co. (CL) was more fortunate. It warned
investors in February it would take a charge of $120 million
because of the bolivar devaluation. But after its warning, analysts
adjusted their estimates and the company ended up beating Wall
Street forecasts for its first-quarter earnings and revenue, with
shares rising 1.3%.
If reporting season continues as expected, companies will see
sales decline 0.6% from the year-earlier quarter, compared with
expectations for a 0.5% gain. While that may seem like big miss,
using Mr. Knapp's estimate for the dollar's impact, which is on the
conservative side, sales would be up 0.4% when adjusted for
currency effects.
Analysts and strategists say it is tough to model for currency
changes, because companies hedge their exposure with varying
degrees of success.
As a result, many market watchers are looking past quarterly
moves in currency and focusing on growth.
"I don't think investors are going to ding a company" for a
currency miss, said Owen Fitzpatrick, chief equities strategist
with Deutsche Bank Asset & Wealth Management, which manages
roughly $1.2 trillion in assets globally.
Write to Alexandra Scaggs at alexandra.scaggs@dowjones.com
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