Philip Morris faces currency headwinds

The dollar's appreciation is not necessarily good for US companies.

By Benzinga Jun 22, 2012 8:24PM
Image: Euro (© Royalty-Free/Corbis)By Brandon Pilzner, Benzinga Staff Writer

Philip Morris (PM) cut its full-year EPS guidance on Thursday, citing currency headwinds.


The company revised its full-year diluted earnings forecast to a range of $5.10 to $5.20 a share versus actual results of $4.85 for 2011. This new guidance range was lower than analyst estimates of $5.23. The company primarily cited prevailing exchange rates as the cause of this revision.


Excluding an unfavorable currency impact of approximately 25 cents for full year, Philip Morris expects diluted earnings per share to increase by 10% to 12% versus adjusted diluted earnings per share of $4.88 in 2011.


Since June 2011, the U.S. dollar has been appreciating against other major currencies. As a result of global economic uncertainty, investors seem to be flocking to the U.S. dollar to hedge against risk in the markets. Over the past 12 months, the U.S. dollar has appreciated about 12% against the euro, and is up about 10% as an index versus a basket of other currencies.


A strong dollar is not necessarily positive for U.S.-based companies, since a strong dollar makes it more expensive for foreign companies to import goods from the United States. Below are a few companies who cited currency as a headwind going forward, and some others that could be negatively affected.


Recent examples

On Wednesday, Procter & Gamble (PG) announced fiscal-year guidance. The company stated that its earnings per share are expected to be in line to a mid-single digit percentage increase from fiscal 2012 results.


P&G noted that foreign exchange, based on early-June spot rates, will negatively impact fiscal 2013 EPS growth by approximately 4%.


On June 19th, Pepsico (PEP) released a regulatory filing to update investors stating that it expects earnings per share to decrease by 5% in 2012 from its fiscal 2011 EPS of $4.40.


Based on the current foreign exchange market consensus, foreign exchange translation would have an unfavorable impact of approximately three percentage points on PepsiCo's full year core EPS performance in 2012.


The world's largest fast food hamburger chain, McDonald's (MCD), reported that its global comparable sales rose only 3.3% in May, lower than analyst estimates of 5.2%.


McDonald's stated that at current exchange rates, foreign currency translation is estimated to negatively impact its earnings by 7 cents to 9 cents per share for the second quarter.


How to take advantage

A stronger dollar will likely hurt some companies with commodity exposure. A strong dollar weakens the prices for commodities, as most commodities are denominated in U.S. dollars. One company that could be negatively affected by this is Alcoa (AA).


Alcoa is a global aluminum company, which operates in 31 countries. Despite weakening demand across most developing nations including China, foreign countries are likely to purchase less aluminum since their purchasing power has decreased.


Another company that could be negatively affected by a strong dollar is Tiffany & Co. (TIF). A strong dollar relative to the weakening euro will make foreign buyers less likely to spend their income on high end goods, because these goods become more expensive.


Shares of Alcoa closed Friday .82% higher to $8.62. Tiffany shares closed Friday at $52.56, down 0.65% from Thursday's close and 21% this year.


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