Companies from Philip Morris International Inc. (PM:US) to Colgate-Palmolive Co. (CL:US) are finding that overseas expansion has its drawbacks as a stronger dollar makes it more expensive to repatriate profits from abroad.
Philip Morris, the New York-based maker of Marlboro cigarettes, said yesterday unfavorable currency moves were one of the reasons first-quarter earnings fell below analysts’ estimates (PM:US). The U.S. Dollar Index has soared more than 13 percent from some of its lowest levels in a decade in 2011.
After depreciating while the Federal Reserve printed money to bolster the economy following the worst financial crisis since the Great Depression, the greenback is gaining favor with growth forecasts to exceed that of the Group of 10 through at least 2015. For companies with a big overseas presence, a stronger dollar reduces the value of international profits and makes their products more expensive in foreign countries.
“It’s not something you can avoid,” Linda Bolton Weiser, a New York-based analyst at investment bank B. Riley & Co., said in an April 17 phone interview. “Your sales, and therefore the profit, you earn in the foreign country, will need to be translated into U.S. dollars.”
The dollar’s advance probably hurts household and personal- care products makers, including Colgate, the most, with beverage and tobacco companies also affected, Lauren Lieberman, an analyst at Barclays Plc in New York, said in an April 5 report. PepsiCo Inc. (PEP:US), the world’s largest snack-food maker and producer of soft drinks said yesterday that currency fluctuations reduced its sales.
Philip Morris generates all of its sales outside of the U.S. after its March 2008 spinoff by Altria Group Inc. (MO:US) The split gave overseas markets to Philip Morris and left Altria with sales of Marlboro cigarettes and other tobacco products in the U.S. McDonald’s Corp., the biggest restaurant chain by sales, is targeting new markets for much of its expansion.
A recession in the 17-nation euro region contributed to the 3.6 percent gain this year in the U.S. Dollar Index, which tracks the currency against the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona. Since Feb. 1 the dollar has strengthened 4.2 percent versus the euro, 3.2 percent against the Colombian peso and 6.4 percent versus the yen.
U.S. gross domestic product will likely be growing at a 2.6 percent annual rate by the end of the year, compared with an average of 1.87 percent for G-10 nations, according to separate surveys of economists by Bloomberg.
By year-end, the dollar will probably strengthen to $1.28 per euro, 100 yen and $1.49 per pound, Bloomberg surveys show. The Dollar Index (DXY) may rise to 84.9 by the end of the third quarter, from this year’s low of 78.918 on Feb. 1 and 82.659 at 12:18 p.m. in New York.
Philip Morris, whose iconic “Marlboro Man” cowboy has advertised its cigarettes of the same name for decades, said net income fell 1.7 percent to $2.13 billion, while profit per share excluding certain items was $1.29, against analysts’ projections of $1.34. Last year, 35 percent of the largest publicly traded tobacco company’s sales came from the European Union.
Sanford C. Bernstein & Co. lowered its estimate for McDonald’s earnings this year by 8 cents to $5.72 a share on April 3. The restaurant chain’s profit may fall 25 cents a share if the euro, British pound and Canadian and Australian dollars - - the four currencies to which it has the most exposure -- drop 10 percent, according to Sara Senatore, a New York-based analyst at Bernstein.
“That’s a big deal for them,” Senatore said in an interview.
The average estimate (MCD:US) for McDonald’s (MCD:US) profit of $5.78 a share, from 30 analysts surveyed by Bloomberg, is about 1.5 cents lower than four weeks ago. The company today reported first-quarter profit that was little changed as U.S. same-store sales declined for the first time since 2003.
Currency translations will cost McDonald’s 1 cent to 2 cents a share this year, Chief Financial Officer Peter Bensen said on a conference call. The company had previously forecast a benefit of 4 cents to 5 cents a share.
McDonald’s has gotten more of its revenue from overseas in the past decade as it opened restaurants in emerging markets such as China and entered new countries, including Bosnia and Herzegovina and Trinidad and Tobago.
The company, which has about 34,400 outlets worldwide, said last year it received 39 percent of its revenue (MCD:US) from Europe and 23 percent from Asia Pacific, the Middle East and Africa. It said yesterday it will increase the price of its burgers in Japan for the first time since 2008.
The strong dollar isn’t all bad for food and restaurant companies, according to Bryan Elliott, an analyst at St. Petersburg, Florida-based Raymond James Financial Inc. An appreciating currency will help American eateries by curbing international demand for U.S. commodities, reducing prices for raw ingredients at home, he said in an April 17 interview.
“The swings in the dollar will impact export demand for grains and finished goods,” Elliott said.
PepsiCo reported first-quarter profit (PEP:US) yesterday that topped analysts’ estimates, though it also said unfavorable currency fluctuations reduced sales.
Cincinnati-based toiletries manufacturer Procter & Gamble Co. (PG:US) may earn $4.05 a share, while rival Kimberly-Clark Corp. (KMB:US), which produces Huggies diapers and Kleenex tissues, may have profit of $5.58, according to Bernstein. Both forecasts are 4 cents lower than previously estimated.
New York-based Avon Products Inc. (AVP:US), the door-to-door cosmetics seller, is exiting overseas markets including Ireland, South Korea and Vietnam to save money. Chief Financial Officer Kimberly A. Ross in February blamed the weaker Argentine peso for the company’s “soft” sales in that country.
Bernstein estimates that Colgate-Palmolive, the New York- based toothpaste maker, will earn $5.67 a share in 2013, 24 cents less than its analysts previously projected, mainly because of currency moves.
The average estimate for Colgate’s earnings has slid 1 cent in the past four weeks and 17 cents in the past three months, data compiled by Bloomberg show.
Colgate had 78 percent of its sales outside the U.S. last year, including 29 percent from Latin America. In the past, the company could raise prices to compensate for currency fluctuations, though together with its rivals, it no longer has that option, said Ali Dibadj, an analyst at Bernstein based in New York.
“Competition is great because the world is not growing as quickly,” Dibadj said in an April 4 phone interview. “The consumer in many categories isn’t accepting” price increases, he said.
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