Finally, a bright spot for the dollar
The falling dollar was supposed to help some US companies, but didn't. That could change in Q4.
The weak dollar will finally start showing up as a plus in company earnings in the fourth quarter.
In the third quarter, each of these companies noted that “currency effects” resulted in hits to reported revenue of as much as 7 cents a share.
So what’s going on? A weaker U.S. dollar is supposed to help the reported revenue and earnings for companies like these.
When sales in Euros or baht or yen are translated back into dollars, a weak dollar turns them into more dollars.
And the dollar has certainly been weak in 2009. The U.S. dollar has fallen against the Dollar Index of the euro, pound, yen, Swedish krona, Canadian dollar and Swiss franc by 6% this year. (For when the dollar might turn see this post.)
So how is it possible that the dollar cut 22 cents off McDonald’s earnings in the first nine months of 2009?
Because, like earnings themselves, the gain or loss from currency effects is a year-to-year comparison. So the gain or loss in the dollar from the beginning of the year is irrelevant when it comes to reporting earnings.
It’s the change in the dollar from the third quarter of 2008 to the third quarter of 2009, from the second quarter of 2008 to the second quarter of 2009, and so on, that counts.
And on this comparative basis, because of when the dollar dropped and temporarily rallied in 2008 and 2009, the dollar has actually been stronger in this year’s third and second quarters than it was at the same time last year.
Those same comparisons that have hurt results at U.S. companies with a big percentage of sales overseas are about to reverse.
In the fourth quarter of 2009, the dollar is likely to be weaker than it was in the fourth quarter of 2008. As of October 29, for example, the euro is 16% higher against the dollar than it was a year ago.
Companies are starting to include the positive effect from a weaker dollar in their guidance for fourth quarter earnings.
For example, when Procter & Gamble gave guidance on its fiscal second quarter (the one that ends in December) on October 29, the company said a weaker dollar was expected to add one to two percentage points to net sales growth in the period.
That’s quite a change from the fiscal first quarter when the dollar was one reason the company showed a 5.6% drop in revenue from the fiscal first quarter of 2008.
The weak dollar comparisons aren’t likely to be a gold mine for these companies, however. Remember that they both sell their products and buy their raw materials in dollars.
A falling dollar may translate into higher dollar revenue numbers but it also means that U.S. companies are paying more for many raw materials.
At the time of this writing, Jim Jubak did not own or control shares of any stock mentioned in this post.
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