My question on the extent of the Brazil Real devaluation and its effects on CPQ 1Q earnings
Message 8429293
is answered in the Barrons article of today's date, referenced below. Apparently my working assumption of 50% devaluation at its peak was about 8% too much. Its peak of 2.20 to the $ (from 1.20) was reached in early March - after Mason spoke to CSFB. It has now recovered and the devaluation is about 28%. (Check my maths).
My questions about which CPQ "receivables " it applied to stand, as does my accounting questions. But if current Real values hold, or improve, as is suggested in the article, perhaps the amount for the "charge" is going to be significantly less than the $200 million (or 2 cents EPS) Mason provided for in his comments. Furthermore, prospects for the remainder of the year in Brazil are already improving, both in terms of economic activity and the value of the Real.
The appropriate references are:
"Beset by political and financial woes, Brazil was forced January 15 to float (read: devalue) its currency, the real, and sharply hike interest rates. Early in 1999, $1 bought 1.21 Reals. The Real fell to 2.20 intraday early in March, but recovered to 1.86 to the dollar last week. The overnight interest rate, to which 70% of domestic debt is tied, recently was raised to 45% from 39%, and inflation has soared.
Not to worry, says Pelosky, the worst soon may be over. In his view, recent moves by Brazil's central bank "have been astute" and haven't yet been fully understood by foreign investors. Briefly, the two main worries for debt and equity markets were "an out-of-control currency and the looming threat of a domestic debt restructuring." In a nutshell, neither threat "is as valid as it was a few weeks ago."
Not only will part of a credit from the International Monetary Fund be used to defend the real, but an international bond issue is "highly likely" to follow in a month or so. In turn, the rate hike is thought sufficient to fuel domestic debt rollovers.
In this scenario, inflation could peak at a 4% monthly rate in March, then fall to 3% in April; interest rates could decline within four to six weeks; the real could rise to 1.62 by yearend; the economy, and with it earnings, would recover; and equity valuations could be re-rated upward, with price/earnings ratios rising to 10-14 times estimates from six to eight times." |
