BL: Euro Slide Leaves U.S. CEOs Wringing Hands With Profit Forecasts at Risk
By Rachel Layne and Carol Wolf
April 29 (Bloomberg) -- United Technologies Corp. finance chief Greg Hayes sets aside some wiggle room in his profit forecast every year for swings in the euro. By March, half his safety net had already evaporated.
The maker of Otis elevators and Pratt & Whitney jet engines, which gets about a quarter of its sales from Europe, started 2010 assuming a $1.48 euro exchange rate. Hayes cut it to $1.37 last month as concern mounted that Greece would default on its debt. This week, the euro dropped below $1.32 for the first time since April 2009.
“It’s one of those things that you can’t control,” Hayes said in an interview April 23. “In fact, I think our stock is actually down the last couple of days because of this Greece crisis.”
Terex Corp., DuPont Co., McDonald’s Corp. and Johnson & Johnson also said in the past two weeks that the euro’s slide is affecting profit or may hold back growth. The 8.2 percent decline in the currency so far this year makes U.S. exports more expensive and lowers overseas sales when euros are translated to dollars, threatening a potential rebound in revenue and a lift to the economy.
Analysts, who have cut their second-quarter forecast for Europe’s common currency every month this year, expect it to trade at $1.35 in June and $1.32 by December. The euro will weaken to $1.30 by the first quarter of 2011, according to the median of economists’ estimates compiled by Bloomberg.
‘Hand-Wringing’
“U.S. CEOs are going to be doing a lot of hand-wringing over the next couple of quarters,” said Thomas Laming, a money manager with Scout Investment Advisors in Kansas City, Missouri, which manages $10 billion in assets. “There is going to be an impact on U.S. multinationals. It may cause some companies to miss the earnings estimates that are out there.”
DuPont, the third-biggest U.S. chemical maker, is expecting the euro to average $1.34 this year, Chief Financial Officer Nicholas Fanandakis said. Currency exchange added 10 cents to per-share earnings in the Wilmington, Delaware-based company’s first quarter, and that may deteriorate to as little as 5 cents for the year, he said.
“As the dollar strengthens, for us it is a headwind,” Fanandakis said this week in a telephone interview.
More Expensive Goods
McDonald’s recorded a 5 cent benefit to earnings per share in the first quarter. That was at the low end of a 5 cent to 6 cent forecast the company gave in January because of the strengthening U.S. dollar against the euro and the pound.
Currency fluctuations will hurt earnings in the second half of the year, based on current exchange rates and McDonald’s business outlook, Chief Financial Officer Peter Bensen said on an April 21 conference call with analysts. For the year, the company still anticipates exchange rates will add to earnings, he said. Bensen said his outlook could change.
“We recognize this estimate becomes outdated within days,” Bensen said.
McDonald’s, based in Oak Brook, Illinois, got about 40 percent of its $5.61 billion in revenue from Europe in the first quarter. Lizzie Roscoe, a spokeswoman for McDonald’s, declined to comment beyond Bensen’s statements.
“McDonald’s sells more hamburgers overseas than they do in the U.S.,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a April 27 phone interview. “That will have a notable impact, especially when you couple that with the fact that the euro has been falling for the better part of six months.”
Air Conditioners, Helicopters
At Hartford, Connecticut-based United Technologies, Hayes had a “contingency plan” -- a cushion in his forecast -- of $250 million because he was concerned about the euro. In March, he told investors he cut it in half, to $125 million, with the euro at a rate of $1.35.
He says that by controlling costs he can still make the profit forecast -- for $4.50 to $4.65 a share this year -- if the euro were to drop to $1.25. Because most of its goods, which also include Carrier air conditioners and Sikorsky helicopters, are made or assembled in the countries where they are sold, the unknown is the quarterly reconciliation to translate sales back to dollars.
“The dollar ought to weaken over time versus the euro just because of the deficit spending we have in the U.S.,” Hayes said in the interview, barring a financial meltdown in Portugal, Ireland, Greece and Spain. “So the view long-term is bearish on the dollar. The problem is, on a quarter-to-quarter basis, it gets bumped around a little.”
Spain had its credit rating lowered one step to AA by Standard & Poor’s yesterday as Greece’s debt crisis spread through the euro region. The ratings company cut its rankings on Portugal and Greece earlier this week as European policy makers pushed to speed distribution of emergency aid.
Smaller Benefit
Johnson & Johnson, the world’s biggest health-products company, said last week its sales growth for 2010 would have a positive currency benefit of about 1 percent based on where the euro is now, below its previous projection. The company said a weaker euro was the primary reason for its lower forecast.
The New Brunswick, New Jersey-based company also reduced its annual earnings forecast to as much as $4.90 a share, adjusted for some items, from a January projection of as much as $4.95. Bill Price, a spokesman for Johnson & Johnson, declined to comment beyond last week’s predictions.
Terex, the maker of heavy-duty trucks and cranes, has a forecast for revenue to rise to about $5 billion this year from $4.04 billion last year, when 38 percent of sales came from Western Europe.
“Our net sales outlook will be slightly reduced due to lower anticipated benefits coming from currency translation,” Chief Executive Officer Ronald DeFeo said during a conference call April 22. DeFeo wasn’t available for an interview.
Net sales at Terex fell 3.1 percent to $935.9 million in the first quarter, the Westport, Connecticut-based company said in a statement April 21. The decline was 17 percent excluding about $56 million from the favorable impact of foreign currency rate changes and sales from a port equipment business.
“For right now, on a year-over-year basis, the euro is about flat,” Scout Investment’s Laming said. “Earnings reports for this quarter and next won’t be hugely impacted. The real impact will show up in the third and fourth quarters.”
To contact the reporters on this story: Rachel Layne in Boston at rlayne@bloomberg.net; Carol Wolf in Washington at cwolf@bloomberg.net
Last Updated: April 29, 2010 00:01 EDT
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