sábado, 7 de febrero de 2015

sábado, febrero 07, 2015

Procter & Gamble, the Strong Dollar, and Pepto Bismol

Tony Sagami

February 3, 2015


 
Applied Materials. Boeing. Coach. Ford. Intel. McDonald’s. Nike. Pfizer.
 

What do those household-name companies have in common? Not much, other than that a huge part of the sales come from outside the US.
 

Really, really huge.
 

Collectively, the 500 companies in the S&P 500 get 46% of their sales and roughly 50% of their profits from outside the US. They are truly multinational giants.
 

Expanding your customer base is always a good thing, but doing business overseas is not without peril, and one of the underappreciated perils is the impact of currency movements. A stronger dollar can hurt companies that do a large share of their business overseas because sales in other countries translate back into fewer dollars.
 

Just ask Procter & Gamble, which reported their Q4 results last week.
 
 
 
P&G sold $20.16 billion of toothpaste, laundry detergent, diapers, toilet paper, and razor blades last quarter, but that was a 4% decline from the same period a year ago.
 

Worse yet, profits plunged by 31% to $1.06 per share, which was not only well below the $1.13 per share Wall Street was expecting but also a horrible 31% year-over-year drop. That’s bad.
 

What’s behind those terrible numbers? The US dollar.
 

“The October-December 2014 quarter was a challenging one with unprecedented currency devaluations,” said CEO A.G. Lafley.
 

The US Dollar Index was up 13% in 2014 and is now near a 9-year high. That strong dollar is a big millstone around the neck of US exporters, whose products are now more expensive for foreign buyers as well as negatively affecting profits once those foreign sales are converted back into US dollars.
 
 
 
Worse yet, Lafley said the environment will “remain challenging” in 2015.
 

The US dollar is now at a 9-year high and threatening to go higher. Much, much higher.
 

By historical standards, the US dollar is still cheap and expected to go higher by many observers, including Procter & Gamble.
 

P&G warned Wall Street that its 2015 sales will fall by another 5% and its 2015 profits will shrink by another 12%.
 

Think about those two numbers: 5% lower sales and 12% lower profits.
 

The strong dollar is a big problem for P&G because it gets roughly two-thirds of its revenues from outside the US, so it’s more affected by the strong US dollar than most companies, but P&G is far from alone when it comes to currency woes.
 

The line of companies that have warned that the strong dollar is hurting their profits is getting longer and longer.
 

Microsoft, Pfizer, McDonald’s, Caterpillar, United Technologies, Emerson Electric, 3M, and even Walmart have warned that the rising dollar is depressing their profits.
 

What does this mean to you? That a LOT more companies are going to report lower-than-expected sales and profits in 2015 and those that do will see their stock get hammered, just like P&G.
 

The problem is that Wall Street is blind to this profit-crushing trend.
 

In 2014, the S&P 500 companies collectively earned $117.02, and the median forecast of Wall Street strategists for 2015 S&P 500 earnings is $126, which is an optimistic 7.6% growth in earnings.
 

Unless you think that Procter & Gamble is an isolated island of trouble (and it’s not), you should be very worried that Wall Street is grossly underestimating the profit-crushing impact of the strong dollar as well as grossly overestimating corporate America’s earnings growth.
 
 
That massive disconnect between reality and the Wall Street dream world is going to translate into some very tough times for stock market investors. If you haven’t added some defense to your portfolio… you may need lots and lots of a popular Procter & Gamble product: Pepto Bismol.

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