EVEN Apple, the world’s most valuable company which just set a record with its $18bn quarterly profit, has a currency problem.

In the fourth quarter, as the company sold nine iPhones a second, the dollar strengthened against virtually all its trading partners. The cost to Apple: more than $2bn in lost sales and the brief closure of its Russian website as the rouble plummeted. That problem is only going to deepen, executives caution.

Dozens of US companies have warned that a sharply stronger dollar has eaten into revenues and crimped profits during the final three months of the year, forcing businesses to cut costs as hedging strategies failed to offset currency fluctuations.

Pfizer, United Technologies, Procter & Gamble, Microsoft and Google are among the long list of multinationals that have blamed the greenback for lost sales. Currency consultancy FiREapps says the losses could reach $12bn in the fourth quarter, three times the impact in the third quarter.

The currency swings have had a similar effect to monetary tightening, analysts say, and the difficulty is likely to be exacerbated as the European Central Bank unleashes a fresh round of bond buying. Bank of America expects full-year earnings forecasts to be clipped as strategists update 2015 foreign exchange and energy prices.

Currency swings a deepening problem for export-focused multinationals on S&P 500

“The recent strength in the dollar has put American multinational companies on the back foot when it comes to revenue and earnings guidance for 2015,” says Nicholas Colas, chief market strategist at Convergex. “Moreover, the trend seems to be towards an even stronger dollar. There’s plenty of talk about the dollar going to par against the euro.”

A stronger dollar has several effects on corporate earnings. For most, sales and profit earned abroad are suddenly worth less as companies translate results in euros, yen and so forth back into the US currency. Further, the cost to manufacture goods in the US has remained steady, forcing executives to either raise prices to protect margins, at the loss of some orders, or maintain prices to avoid alienating customers.

At Apple, chief financial officer Luca Maestri says the Japanese yen and Russian rouble proved most costly, although profits were also hit by movements in the euro, and Australian and Canadian dollars. Mr Maestri says year-on-year growth in the company’s fiscal first quarter, which includes the festive shopping season, would have been four percentage points, or about $2.3bn, higher if currencies were constant. In the current quarter currency shifts are likely to shave five percentage points off Apple’s growth, or $2.3bn. That is more than S&P 500 constituents Mattel, Royal Caribbean, SanDisk and Charles Schwab each generated in revenues in the final three months of 2014.

As “our existing hedges expire, they get replaced by new contracts at current levels, and therefore the protection that is provided to us by our hedging programme diminishes over time”, Mr Maestri said on a call with analysts.

“It goes without saying a strong dollar has a negative impact on our international business.”

Consumer staples behemoth Procter & Gamble, which owns Tide detergent, Crest toothpaste and Bounty paper towels, called the currency swings ‘unprecedented’, saying they would trim 5pc from sales and 12pc, or at least $1.4bn, from net earnings this year.

Howard Silverblatt, senior index analyst with S&P Dow Jones Indices, says the dollar has been ‘the excuse of the quarter’, with executives pointing to the currency for lacklustre results. More than two-fifths of S&P 500 sales are generated abroad, with technology, energy and industrials sectors realising more than half of revenues outside the US.

For the fourth quarter, earnings per share for the blue-chip index are expected to climb 6.4pc from a year earlier, marginally below forecasts at the start of December, according to S&P Dow Jones Indices. But full-year 2015 forecasts have been trimmed drastically as the dollar soared and oil prices cratered. Analysts see S&P 500 earnings up 2.7pc in the current year, including a first-quarter contraction.

Published in Dawn, Economic & Business, February 9th, 2015

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