US Multinationals' Profits Take a Currency Hit
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To borrow a line from Charles Dickens' A Tale of Two Cities, “It was the best of times, it was the worst of times.” That line may well be used by investors to describe the changing fortunes of US multinational companies.
In recent years, these companies prospered as overseas economies easily outpaced the American economy and the U.S. dollar weakened, making exports more competitive while boosting the dollar value of foreign earnings. But now the tide has turned. Europe is in crisis and even emerging markets are experiencing growing pains with their economies slowing.
Corporate profits, especially for multinationals with large exposure to emerging markets, will likely continue to suffer as emerging market currencies suffer through their biggest sell-off in a decade.
Among the BRIC countries, both the Indian rupee and the Russian rouble are down roughly 11 percent in the second quarter while the Brazilian real is lower by about 12 percent. Other fairly liquid emerging market currencies such as the Mexican peso, South African rand and Polish zloty are also down substantially this quarter, from 6.5-9.5 percent. The second quarter of 2012 adds up to, according to Bloomberg, the worst on record for emerging market currencies since the Asian financial crisis in 1998.
The fall in emerging market currencies has led to earnings warnings from multinational firms beginning to flow.....
As discussed previously, Procter & Gamble (NYSE: PG) lowered its 2012 revenue and profit guidance, blaming mainly its exposure to developing markets. Guidance on fourth quarter earnings per share was lowered to 75-79 cents versus the previous 79-85 cent range. Organic sales growth is expected to be 2-3 percent, down from an earlier estimate of 4-5 percent.
Another troubled company, Pepsico (NYSE: PEP), also warned on 2012 profits thanks to unfavorable exchange rates. The company said recently that it expects foreign exchange rates to affect earnings negatively by three percentage points. This is up from an earlier forecast of foreign exchange adversely effecting earnings by two percentage points.
Then there is Philip Morris International (NYSE: PM) which warned last week on its 2012 outlook for the second time in two months. The company now expects full year earnings to come in at the $5.10-$5.20 a share range, below Wall Street analysts expectations of $5.23 per share. Earlier this year, Philip Morris' guidance was for $5.23 to $5.35 in earnings.
The lesson here for investors is that what happens in emerging markets is extremely important to the fortunes of many of America's biggest and best companies. So if investors want to keep an eye on the direction of multinationals' earnings, paying attention to the currency market is a good idea.
Investors can easily track the movements of emerging market currencies through the use of exchange traded funds (ETFs). There are a number of currency ETFs which track individual emerging market currencies, but it is probably easier for investors to simply follow a broad-based emerging market currency ETF.
An ETF which meets that criteria is the WisdomTree Dreyfus Emerging Currency Fund (NYSEMKT: CEW). The fund seeks to achieve returns based on money market rates (through short-term investment-grade instruments) in developing countries along with changes in the value of the currencies relative to the U.S. dollar. The constituent emerging nations currencies are: Brazilian real, Chilean peso, Chinese yuan, Indian rupee, Indonesian rupiah, Malaysian ringgit, Mexican peso, Polish zloty, Russian rouble, South African rand, South Korean won and Turkish lira. It's an ETF worth paying attention to when trying to decide whether to buy the stocks of U.S. multinationals.
tdalmoe has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo and The Procter & Gamble Company. Motley Fool newsletter services recommend PepsiCo, Philip Morris International, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.