Joel, more on the weak Euro: Dow Jones: Weak Euro=" the canary in the mine?"
msnbc.com
Companies cite
soft euro as reason
for profit shortfall
Are they the canaries
in the coal mine?
By Jeff D. Opdyke
THE WALL STREET JOURNAL
June 23 ? The Asian currency crisis. Y2K fears. El Nino weather patterns.
In the past several years, these are some of the reasons companies have
cited for weakness on their profit statements. Now, it?s the euro.
A HOST OF COMPANIES have begun blaming softness in the European common currency
for impending profit problems. Leading the pack: Gillette, Procter & Gamble and other
consumer-products companies that recently rattled Wall Street with news that profit
or sales will be weaker because of the euro?s slump.
What?s interesting is that these were the same companies that back in 1997
were the first to warn of earnings weakness due to the effects of a tortured baht, ringgit and won
on their overseas sales. Six months later, they were again among the first to presage trouble
when the currency crisis alighted in Latin America, pinching pesos and beleaguering bolivars.
In both cases, within weeks, companies in a variety of other industries picked up on the
currency blues and announced their own problems.
?That leads you to wonder if these guys are the canaries in the coal mine again,?
says Chuck Hill, research director at First Call/Thomson Financial.
Many analysts and money managers are past wondering.
They expect the companies? explanation for their shortfall
?is going to go off like a light bulb in everyone else?s head,?
says Charles Scavone, a portfolio manager for several mutual funds at
Aim Capital Management, Houston.
?Once the first company does it, others use it, too.?
So far, about 10 companies have preannounced earnings weakness
for the current quarter due in part to a limp euro, which fell at one point as
much as 25% after its debut last year at the equivalent of $1.18.
The euro has rebounded of late, but remains below parity with the dollar.
Along with the consumer-products giants, McDonald?s, Sara Lee,
chemical company Solutia, Federal-Mogul and Office Depot
all in recent weeks have blamed anemia in the European common currency
for some of their coming profit shortfall.
Mr. Hill is ?sure this isn?t the end of it.? He says there is a decent likelihood
that a number of additional companies in other industries will announce
euro-centric warnings as the current quarter?s earnings season heats up over the next few weeks.
The most likely are companies with strong sales ties across the Atlantic.
More than 220 companies in the Standard & Poor?s 500 index break out sales in Europe,
according to data compiled by S&P CompuStat, a market-research database.
The companies range from pharmaceutical firms to energy companies to electronics makers.
For these, a strong dollar means their products aren?t as competitive
on a price basis with local goods.
Furthermore, when they do book sales in a foreign currency,
they are repatriating fewer dollars in the currency-conversion process.
In either case, the profit statement suffers.
In 1997, the nonconsumer companies that reported soft sales or earnings in Asia
included Oracle, Motorola, insurance giant American International Group, Caterpillar and Boeing.
Investment pros point to some of the same caliber of companies this time around.
Frederick Ruopp, chairman and chief executive at Chelsea Management Co.,
a Los Angeles investment-advisory firm, notes that
Caterpillar, IBM and Intel each has strong ties to European sales.
?The pattern is bound to impact companies like them.?
Still, he is currently a fan of both IBM and Intel as investments.
Officials at IBM decline to comment on the issue, and Intel officials say
they can?t comment because the company is in a ?quiet period? prior to its mid-July
quarterly earnings announcement. A Caterpillar spokeswoman says the heavy-machinery
company has lost some ground because of the euro,
but lower costs have offset any potential earnings impact.
Many companies hedge their operations against currency fluctuations as a way
to protect their profits.But earlier this year, a number of corporate financial officers noted that
they hadn?t expected the euro to slump as quickly and drastically as it did, and hadn?t
hedged against such a fall. Moreover, many expected that when the euro hit parity with the dollar,
it wasn?t likely to fall much further, so again many opted not to hedge against a continued decline.
The euro ultimately sank to less than 90 cents to the dollar.
Certainly, there is a vastly different economic backdrop this time around.
For one thing, Asia?s currency collapse foretold of troubled economies and feeble consumer
spending that lasted for many months. Moreover, commodity price deflation then further impinged
on developing nations? economies and corporate income statements.
By most accounts, though, Europe?s economies are healthy.
Consumer spending is rising and unemployment is creeping down.
And this time around, commodity prices are moving up in many cases.
For those reasons, Todd Petzel, chief investment officer of
Commonfund Asset Management Co., Wilton, Conn.,
says that euro-based negative earnings announcements
?won?t be a big threat to the marketplace.?
Still, others say history could repeat.
Late last month, Ed Keon, director of quantitative research at Prudential Securities
, revised downward his domestic earnings forecast, in part
because of ?the strength of the U.S. dollar.? Mr. Keon was expecting
corporate earnings to grow as much as 18%; he has tamed that to 13%
. ?I definitely expect to hear more euro problems? coming out in earnings announcements, he says.
Heather Hay, a consumer-products analyst at Merrill Lynch, says
the large, consumer-products companies tend to be at the vanguard of currency weakness because
?they have a significant degree of exposure? to foreign sales, so
a slide in the euro ?becomes meaningful very fast.?
That leads her to conclude that if those ?high quality, stable companies can?t make the numbers
[because of the euro], it wouldn?t surprise me to see other companies follow suit.?
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