Earnings: At the Mercy of a Mercurial Dollar

A rebound in the greenback could take a big bite out of U.S. corporate profits. With the world economy in turmoil, expect extreme currency movements to continue to vex investors

By Ben Steverman

Investors in U.S. stocks were celebrating the weak U.S. dollar last year. Now that the buck has strengthened, it's payback time.

For the first half of 2008, the dollar was stuck in the doldrums, but that was good news for U.S. companies. While their domestic market was in recession, U.S. firms could report big sales figures from abroad. Sales made overseas in expensive euros or pounds looked that much larger when brought back home and converted into cheap dollars.

That changed dramatically in late 2008 when the financial crisis heated up and it became clear that the economic slowdown would be global. The U.S. dollar index, a measure of the greenback against a basket of foreign currencies, jumped more than 20% in four months, peaking in late November.

Fourth-Quarter Earnings Suffer

This fourth-quarter currency whiplash should show up dramatically in end-of-the-year financial results. The fourth-quarter earnings season officially starts on Jan. 12, when Alcoa (AA) reports results.

Investors already have been given previews of the damage from the dollar's comeback:

Oracle (ORCL) earnings per share were flat in its second quarter, but earnings would have risen 11% without the dollar's rebound, the software firm said Dec. 18. Almost half of Oracle's sales in the quarter came from outside the Americas.

Wal-Mart Stores (WMT) disclosed Jan. 8 that its international revenue would have risen 8.3% in December if not for the strong dollar. Instead, last month's international sales plunged 10.4%—a $2.2 billion bite out of the world's largest retailer's sales.

General Mills (GIS), which reported results Dec.19, saw the impact of currency shave eight percentage points off sales growth for its international business. International sales still managed to rise 2%.

Best Buy (BBBY) said Jan. 9 that foreign currency exchange rates cut international sales by 16 percentage points.

Carnival Cruise (CCL) said Dec. 8 that net revenue yields—a measure in the cruise industry of revenue compared to available ship capacity—would be off 11% to 15% in 2009 through changes in exchange rates.

Lowered Overseas Costs, Higher Commodity Prices

The stronger U.S. dollar isn't all bad news for U.S. firms. Their expenses abroad are also falling. Even as Alcoa announced it was cutting 13,500 jobs, the aluminum company also said it would need to spend $150 million less to finish a mine and refinery in Brazil—because of "efficiencies and a strengthened U.S. dollar."

That's small comfort to a company like Alcoa, however, because of the trouble a weak dollar causes for commodity prices. "Companies that are hurt most by a rising dollar tend to be commodity companies," says John Derrick, director of research at U.S. Global Investors (GROW). "Typically, commodities perform inversely to the dollar."