Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Currencies Play an Important Role in Corporate Earnings

Companies / Corporate Earnings Jul 24, 2010 - 05:09 PM GMT

By: Bryan_Rich

Companies

Best Financial Markets Analysis ArticleIt’s earnings season. And more and more companies are talking about currencies.

The headlines read like this …

“Weak Euro a Drain on S&P 500 Revenues”


 ”Currency Fluctuations Wipe $500 Million off IBM Top Line”

 ”EBay Lowers Forecast as Currency Weighs on Revenue”

“PepsiCo Earnings Down 3 Percent on Currency Moves”

It’s important to realize the role that currencies play in the performance of multi-national businesses. The impact can be huge. However, the attention given to managing such a powerful force is, in many cases, shockingly little.

S&P 500 companies derive nearly half of their sales from outside the U.S. And for any global company, currencies can impact business in a number of ways. For instance, there’s:

  • Translation exposure, when a company converts foreign-earned revenues to its home currency …
  • Transaction exposure, where prices paid or received for goods are influenced by currency …
  • And economic exposure, where the company’s competitive advantage, cost of goods sold, input costs, balance sheet values are affected.
S&P 500 companies get a big percentage of their sales from foreign markets.
S&P 500 companies get a big percentage of their sales from foreign markets.

For an American-based company, when the dollar is stronger during a reporting period, translating its foreign earned revenue can result in a drag on performance. That’s because each unit of foreign-currency denominated revenue will exchange for fewer dollars, when it’s converted to report financial results.

During the most recent calendar quarter, that’s certainly been the case. In fact the dollar index, which measures the dollar against a basket of currencies, gained more than 6 percent during the period.

And in Europe, the problems surrounding sovereign debt and the uncertain future of the euro have made the euro quite weak — posing a significant headwind to companies that do business in or with Europe. Every euro of revenue generated at the beginning of the quarter bought nearly 9 percent fewer U.S. dollars at the end of the quarter.

Many large multi-national companies have active currency hedging strategies that, in theory, can manage or even eliminate the risk of currency fluctuations. But the approach and objectives of corporate management varies to a large degree. And they don’t all solve the problem; they sometimes compound it.

Consequently, you might have seen more and more quotes like this in reporting statements … “In constant currencies, the Company posted higher revenues, operating income and earnings per share compared with the prior year.”

Here’s What That Means …

Constant currency reporting allows companies to show performance without the effect of currency fluctuations.

These results are calculated by translating current year results at the prior year’s average exchange rates.

Some companies choose to ignore currency fluctuations in their earnings presentations.
Some companies choose to ignore currency fluctuations in their earnings presentations.

As a currency trader, I have a hard time taking things at face value. So when I see a company stripping out currency effects, I know that’s the first area I should investigate.

In most cases, companies underestimate the power of currencies on their global business. Furthermore, about 25 percent of large companies that are exposed to currency fluctuations don’t do anything to hedge it.

And smaller firms are much less likely to do so. They don’t have the resources (time/staff/expertise), they don’t think the risk is a big deal, or they just don’t think that hedging adds value.

So in many companies, the plan of action to address currency risk is no action.

For all of the efforts to improve efficiencies, lower costs, boost sales … when it comes to currencies, many companies just go about their business and hope for the best. The notion: It will all even out in the long run.

When currencies work in their favor, they’re heroes. When currencies work against them, they blame currencies and talk in “constant currencies” terms. What’s certain is this: Whether or not currency exchange rates even out in the long run, they can crush a company’s investors in the short run.

So when a company heavily promotes revenues and earnings in “constant currencies” during an earnings report, you can bet that either the company chose to ignore currency risk or they’ve attempted to manage currency risk and made some bad bets.

Company Executives Playing the Role of Currency Speculator

If a company is happy reporting in “constant currencies,” it should just fully hedge its currency risk. In other words, it should just take the impact of currencies out of its business.

Then all of the constant currency speak would approximate reality.

But the reality is some companies have a tendency to fold to human nature and become speculators on currencies. They don’t want to lose the positive influence of currencies on their business, just the negative influence. This begets speculation, which exposes companies to losses.

Yes, the executive teams at restaurant operators, drug makers, car companies, and IT firms are all forecasting currencies. These aren’t small decisions. They’re huge! And these decisions can result in hundreds of millions of dollars of losses. Even BILLIONS.

Forget about the fast and loose assumptions companies have already taken with their core business projections. When these folks are guessing where currencies will be in three months, their guidance on future performance expectations becomes dramatically even more error prone.

Bottom line: Don’t ignore currencies. In a world where debt and deficits are being scrutinized, currency devaluations will likely follow. That means you should expect global currency markets to continue to be volatile and undergo major adjustments, which will indeed pose a formidable challenge for your stock portfolio.

Regards,

Bryan

P.S. I’ve been showing my World Currency Alert subscribers how to use exchange traded funds to protect their wealth and profit … as currencies rise and fall. If you’re not a subscriber, you can check it out by clicking here.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in