U.S. companies are poised to post some of their weakest quarterly earnings reports in four years, in part as a stronger dollar erodes the value of toothpaste to tablet computers sold overseas.
Earnings at Procter & Gamble Co. (PG), the world’s largest consumer-goods producer, may drop the most in three years, based on analysts’ estimates compiled by Bloomberg. Apple Inc. (AAPL), already facing its first back-to-back profit decline since 2003, raised the price of iPads and iPods in Japan in May to help blunt the blow from the weakened yen.
The dollar’s strength against the yen, euro and Venezuelan bolivar is contributing to a projected 1 percent decline in second-quarter earnings for nonfinancial companies in the Standard & Poor’s 500 Index, the second-worst performance since 2009. Analysts see at least three more quarters of weakening for the yen and euro, cutting the dollar value of goods from Tiffany & Co. (TIF:US) trinkets to Delta Air Lines Inc. (DAL) tickets sold overseas.
“Companies aren’t currency traders so they’re dealing with the risks of doing business abroad,” said Nick Raich, chief executive officer of the Earnings Scout, an independent economic research firm based in Cleveland.
The currency risks add to an already difficult sales environment. The International Monetary Fund yesterday reduced its prediction for global economic growth this year to 3.1 percent from its 3.3 percent forecast in April. The IMF lowered its prediction for the U.S. to 1.7 percent from 1.9 percent.
Profit by all S&P 500 members, including financial companies, rose a projected 1.8 percent, the least in a year, the estimates show. Even so, analysts who have reduced earnings forecasts in recent weeks have boosted price targets on the companies, convinced the economy is growing fast enough to lure investors. The index has advanced 16 percent this year.
S&P 500 companies may have earned a combined $26.40 a share in the second quarter, down from a March projection of $27.46, according to Howard Silverblatt, the senior index analyst at Standard & Poor’s in New York. Weakening currencies “have definitely played into it,” he said in an interview last week.
The yen has weakened by about 21 percent against the dollar since Oct. 31, when Japanese Prime Minister Shinzo Abe started a campaign to lower the currency to spur the country’s economy. The euro declined 6.3 percent since Feb. 1, and Venezuela devalued the bolivar by 32 percent on Feb. 8 in its government’s fifth such move in nine years.
Companies with most of their sales outside the U.S. were hurt most, based on the estimates compiled by Bloomberg. Per-share earnings sank an average 17 percent on a 3.5 percent sales drop among about two dozen S&P 500 firms that get at least half their revenue in the Asia-Pacific region.
Selling in Japan “is going to be hard” for retailers such as Tiffany and handbag maker Coach Inc. (COH:US) because of the weakening yen, Silverblatt said.
New York-based Tiffany, which gets about 16 percent of its sales from Japan, cited the negative impact of the yen in May in maintaining its full-year profit outlook, even after first-quarter sales and earnings exceeded expectations.
Coach (COH) may post its smallest earnings increase in almost four years, with analysts estimating a 3.5 percent gain for the quarter ended in June. Coach gets a third of its sales overseas.
“The weakening yen makes our very profitable Japan business smaller for our business,” Victor Luis, who takes charge as Coach’s CEO next year, told analysts April 30. Luis runs the New York-based company’s international business.
P&G, the Cincinnati-based maker of Crest toothpaste and Tide detergent, projected negative currencies will reduce full-year sales growth by 2 percent.
Analysts estimate P&G’s profit slipped 6.1 percent to 77 cents a share in its just-ended fourth quarter, the most since a 14 percent drop in the final three months of its fiscal 2010.
Atlanta-based Delta, which relied on the Pacific region for 11 percent of sales last year and operates a hub at Tokyo’s Narita airport, said on July 2 that the yen reduced unit revenue for a fourth straight month.
The currency risk isn’t limited to the yen. Clorox Co. (CLX), the Oakland, California-based maker of bleach and cat litter, is projected to report its biggest earnings drop in two years, due in part to currencies and economic conditions in Argentina and Venezuela. In February, Venezuela weakened the exchange rate by 32 percent to 6.3 bolivars per dollar.
Some companies are trying to try to ease the effects of the stronger dollar.
Corning Inc. (GLW:US), the maker of optical fiber and liquid crystal display glass, started reporting results with a constant yen to evaluate its core financial performance. The Corning, New York-based glassmaker, which gets more than 60 percent of sales from the Asia-Pacific region, took the steps in the first quarter as the yen’s decline accelerated.
Corning (GLW) is poised for a second straight quarter of little-changed earnings per share, based on the average estimates.
In May, Apple raised prices in Japan about 16 percent to 49,800 yen ($492) for a basic iPad and 14 percent for an iPod Shuffle player. Earlier that month the yen weakened beyond 101 against the dollar for the first time in four years.
Apple, which didn’t introduce any products during the quarter other than an update to its MacBook Air laptop line, is projected to say earnings dropped 22 percent to $6.9 billion, or $7.27 a share, after an 18 percent decline the previous quarter.
The dollar is this year’s best-performer in foreign-exchange markets and is poised to strengthen further as improving U.S. growth and more monetary easing from Europe to Japan raise expectations of asset purchase tapering. The U.S. Dollar Index surged on July 9 to its highest level since July 2010. Options traders are betting than 29 of 31 major currencies tracked by Bloomberg will fall this year versus the dollar.
The dollar climbed after June 19, when Federal Reserve Chairman Ben Bernanke said the U.S. central bank may begin tapering its $85 billion in monthly bond purchases and end them in mid-2014. The program, designed to put downward pressure on borrowing costs and spur growth, tends to devalue the currency.
“Tapering by the Fed may increase the headwinds,” said Walter “Bucky” Hellwig, who helps manage about $17 billion for clients in BB&T Corp.’s wealth management unit from Birmingham, Alabama. “To offset that, we need to continue getting strong employment numbers domestically because Europe’s in recessionary territory and growth in China is slowing.”
The U.S. jobless rate held at 7.6 percent in June, near a four-year low, as employers added more jobs than forecast.
The currency risks do hold one benefit for some companies, by giving a handy cover if second-quarter results fall short of estimates, S&P’s Silverblatt said.
“If companies miss their numbers, they have an excuse right away,” Silverblatt said.
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