The US Dollar's Impact on Earnings

Written by Kathy Lien, Chief Strategist

With earning season upon us, everyone from investment banking analysts to longer term investors are scouring data on existing and new product lines for any information on this quarter’s potential sales and profits.Most likely, unless they have inside information, everyone in the market is looking at the same news releases. 

However, there is one consideration that rarely pops into the mind of the American investor but can mean the difference between a good quarter and a bad one – the impact of Currency fluctuations on a company’s bottom line.  Too many times, companies that are expected to report good earnings for the quarter, disappoint due to either a currency’s depreciation or appreciation during those three months as good sales are offset by adverse conversion rates.  We have already seen countless examples of this and with many earnings reports still due for release, smart investors may find it advantageous to start looking at recent currency movements in addition to recent sales reports.   The companies that will benefit the most are the ones that are heavily reliant on international sales. 

In fact, we are already seeing the dollar’s weakness boost revenue for many multinational corporations. 

This week alone, we have had at least SIX major US companies reporting earnings that were directly or indirectly impacted by currencies:

1) Coca-Cola's profits were up 19 percent in Q1 and even though sales were strong, they would not be as strong had it not been for the 9 percent contribution from currency fluctuations.

2) Intel's CEO said this morning that they are not hurt by the US slowdown because 75 percent of their sales are outside of the US. Once again foreign demand is boosting growth.

4) Abbott Laboratories, a health care conglomerate reported a 14 percent rise in revenue, with currency accounting for 5.5 percentage points of this growth.

5) St. Jude Medical Inc, the second largest manufacturer of electronic heart devices said profit rose 27 percent with gains from exchanging foreign currency into U.S. dollars boosting sales by $45 million from a year ago.

6) Yesterday, Johnson and Johnson reported good earnings but even though sales have increased in all 3 of its units, without the increased revenue due to currency fluctuations, drug sales would have actually declined. Revenues increased 7.7 percent in the first quarter with currency moves contributing a whopping 5.1 percent to growth.

This is not the first time that US companies to have benefitted from exchange rate fluctuations. Last month, Nike Inc said that strong overseas sales and beneficial currency rates pushed its profits up 30 percent. Earlier this year, IBM reported an 8 percent increase in sales in 2007 but acknowledged that the increase would have been only 4 percent if exchange rates were excluded. 

Foreign exchange is here to stay and will continue to effect companies and their bottom lines in quarters to come.  The importance is even more evident nowadays as companies continue to look over the horizon at global markets and competitors and continue to expand their businesses into countries like Europe and Asia.  The result leaves sales and product lines exposed to foreign exchange risk.  With everyone in the stock market looking at the same thing, it may very well pay to look outside the box and turn to the currency market as harbinger of current and future earnings. 

By Kathy Lien, Chief Strategist of DailyFX.com

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