Home' Trinidad and Tobago Guardian : February 23rd 2015 Contents A17
Monday, February 23, 2015 www.guardian.co.tt Guardian
NEW YORK---The biggest obstacle for Coca-
Cola and Pepsi these days isn t tied to taste
tests, the declining popularity of sugary
drinks or even their century-long rivalry.
It s the surging US dollar.
The two soda giants rely on overseas cus-
tomers for roughly half of their revenue. When
they turned in their quarterly results last week,
both reported a drop in sales. The strong dollar
made all the difference: strip it out and shrink-
ing sales suddenly rise.
The dollar has been a source of constant
complaint this earnings season. Global cor-
porations from Avon Products to Yum Brands
have said their quarterly results would have
been much better if it hadn t been for the
rising dollar. For some, the currency s strength
has meant the difference between a profit and
"It has really hit earnings," said Jack Ablin,
chief investment officer at BMO Private Bank.
Over the past year, the dollar has climbed
18 per cent against major currencies. The surg-
ing dollar and plunging oil prices are the main
reasons analysts keep cutting their forecasts
for corporate profits even though economists
expect the US economy to pick up speed.
Back in October, analysts estimated that
companies in the Standard & Poor s 500 index
would post profit growth of 11 per cent for
the final three months of 2014. That forecast
now looks overly optimistic. With only a hand-
ful of companies left to report, corporate profits
are on track to rise more than seven per cent,
according to S&P Capital IQ.
Forecasts for this year have taken a much
bigger hit. In December, for example, analysts
projected that profits would increase nine per
cent in the first quarter. Today, they expect
them to shrink more than two per cent over
that same period.
A strong US dollar might seem like a badge
of honour, a reflection of US economic power
in the global economy, but for much of Cor-
porate America, it s bad for business. Almost
half of all revenue for companies in the S&P
500 comes from outside the US, mainly Europe
and Asia. So when the dollar rises against the
euro, it hurts in two ways: Prices of Amer-
ican-made goods become more expensive to
customers in Europe, and goods that move
off foreign shelves translate into fewer dollars,
showing up as lower revenues and earnings
on quarterly financial reports.
Take Avon Products, a company that
depends on customers in Latin America for
nearly half of its sales. Last week, the cosmetics
company reported that its revenue fell 12 per
cent and adjusted earnings sank 41 per cent.
Erase the dollar s move against foreign cur-
rencies and the picture looks entirely different.
Revenue would have climbed five per cent,
and adjusted earnings would have soared 29
At Procter & Gamble, revenue fell four per
cent in the quarter but would have increased
two per cent if the dollar had stayed put. And
the maker of Tide detergent and Pampers dia-
pers doesn t think the drag from the dollar is
over yet. It estimates that the currency s rise
will shave US$1.4 billion from its profit over
the course of the full year.
"This is the most significant fiscal year cur-
rency impact we have ever incurred," said
P&G s chief financial officer, Jon Moeller, in
a conference call discussing the latest results.
The list of companies complaining of cur-
rency swings includes nearly every major
industry. Microsoft, Google and other tech
giants have taken a hit along with Bristol Myers
Squibb, Pfizer and other drugmakers. Even
Apple, which turned in a record profit of US$18
billion in its latest quarter, said the rising dollar
cost the company US$2 billion in sales. Elec-
tric-car maker Tesla, the hotel chain Hilton,
and the navigation device maker Garmin have
joined the ranks of the dollar debilitated. On
Thursday, Wal-Mart slashed its sales forecast
for the rest of the year in half, largely because
of the dollar.
"A lot of the companies I follow have cut
their earnings guidance for the year, and it
was all a result of FX," said Bill Stone, chief
investment strategist at PNC Asset Manage-
ment, using Wall Street s shorthand for cur-
rency moves---foreign exchange. "It wasn t
their underlying business that was the problem.
It was just FX."
Overseas sales used to provide a boost to
US companies. When the economy floundered
during the Great Recession, firms expanded
their businesses abroad, harnessing faster
growth across Asia and South America.
What once looked like a prudent move,
however, has come back to bite them. US eco-
nomic growth is outpacing Europe and Japan,
and growth in China and other emerging giants
has cooled off. The result: a rising US currency
and falling revenue for US companies.
Most analysts on Wall Street believe the
dollar will continue gaining against the euro
and Japanese yen. Jim Paulsen, chief invest-
ment strategist at Wells Capital Management,
said those expectations are based on the idea
that Europe will continue to struggle. What
if Europe s recent efforts to revive its economy
work? Paulsen said it could knock the dollar
down, easing the burden for big US compa-
Last month, the European Central Bank
launched a stimulus effort that sent the euro
to record lows against major currencies. That
might sound like a bad thing, but it could
actually turn things around. The euro s drop
means that European goods are cheaper for
overseas buyers. That could give a boost to
countries with big export industries, such as
Germany and Italy, and help pull the region
out of its long slump. If that happens, the
euro should start recovering, sapping strength
from the US dollar.
"Everybody right now seems convinced that
the dollar is going to stay strong," Paulsen
said. "But I think that a weaker dollar is the
story this year. That will be the real surprise."
Surging dollar hits
US corporate earnings
A worker carries a crate of Pepsi for delivery in Bangkok, Thailand. When beverage giants Coca-
Cola and PepsiCo turned in their quarterly results last week, both blamed the dollar for cutting
into their profits because, like most US corporations, they rely on overseas sales. AP PHOTO
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