Strong Dollar Hits US Multinationals Hard
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A slew of U.S. multinational companies, from DuPont to Procter & Gamble, showed that a strong U.S. dollar hurt their earnings, and several blue-chip exporters said the situation will get worse if the greenback holds its strength.
All told, the resurgent U.S. currency could shave up to $12 billion off U.S. companies' fourth-quarter 2014 revenue alone, according to currency expert Wolfgang Koester, chief executive of FireApps, a data analytics company in Phoenix, Arizona, that examines quarterly reports for currency-related losses.
The pain is hitting multiple sectors, including industrial companies such as 3M Co, technology companies like Microsoft Corp and Apple Inc, airlines such as American Airlines Group Inc, healthcare companies, including Bristol-Myers Squibb Co and Pfizer Inc, and consumer firms like Procter & Gamble - which all garner a large portion of their sales from outside the United States.
"This is a slow-motion crash," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh. It could take a couple of quarters for currency conversion losses to show up, she said.
After hitting a 6-1/2 month low in May, the dollar has surged nearly 20 percent against a basket of major currencies, making overseas sales denominated in other currencies less valuable in dollar terms.
The stronger dollar can also make U.S.-made products more expensive for consumers in other currencies and thus cut demand.
The Dow Jones industrial average, composed of large and well-known companies, was hit especially hard on Tuesday as six of seven companies in the index that reported results since Monday evening declined, with only United Technologies gaining.
"You have companies who don’t normally complain about (the dollar) who are starting to harp on it and it does make sense from an economic perspective that this would be a drag," said James Liu, global market strategist at JPMorgan Funds in Chicago. "It’s really the pace that matters - not just whether it is strengthening or weakening."
The choice for multinationals is stark. They can keep customers loyal by maintaining overseas prices and take a revenue hit from a tough conversion to dollars, or raise prices and risk the loss of customers to cheaper local competitors.
While many companies successfully use currency hedging to at least partly protect against foreign exchange-related losses, the speed and extent of recent fluctuations have made it more difficult to hedge. This has also hurt Wall Street analysts' ability to estimate losses.
One of the worst-hit companies appears to be chemicals giant DuPont, which derives roughly 60 percent of its revenue from overseas. DuPont said the strong dollar cut 7 cents per share off fourth-quarter earnings and will shave 60 cents off 2015 earnings per share based on recent currency rates.
Procter & Gamble said foreign exchange will reduce its fiscal 2015 sales by 5 percent and its net earnings by 12 percent in what it described as its most significant currency impact ever. Bristol-Myers said it expects foreign exchange rates to cut its 2015 revenue by $800 million and 12 to 14 cents in terms of earnings per share.
The impact looks even more abysmal when compared with the 1 cent per share currency impact target that multinationals set for their foreign exchange managers, according to FireApps.
American icon Apple Inc is also at risk as it brings in roughly 62 percent of its revenue from overseas. It had to close its online store in Russia temporarily in December due to dramatic currency fluctuations.
Currency could shave as much as $3 billion off Apple's 2015 revenue even if its hedging strategy succeeds in halving the impact, technology analyst Shannon Cross at Cross Research in Millburn, New Jersey, said ahead of its report.
Apple's Chief Financial Officer said on Tuesday that foreign exchange is a "clear headwind" included in the company's guidance for the year ahead.
Shares in Microsoft, which gets nearly three-quarters of its revenue from overseas, finished off 9.2 percent on Tuesday after it said it was hurt by the strong dollar but gave no specifics.
Medical device maker Stryker Corp said that if exchange rates stay around current levels, it expects first- quarter and 2015 sales to be hurt by 3 percent to 4 percent.
Other notables names citing currency headwinds so far in the earnings season include Johnson & Johnson and IBM.
Dollar strength already shaved at least $4 billion off U.S. corporate revenue in the third quarter, according to FireApps. But actual losses may be much higher as many firms citing currency impacts did not disclose the amount, it noted.