Beating the economic gloom - Emirates24|7

Beating the economic gloom

(AFP)   


 
With the US earnings season well under way amid fears of a lasting and deep economic recession, the one bright spot for leading American corporates has been the continued weakness of the dollar.

The dollar hit an all-time record low against the euro this week as the European currency broke above $1.60 for the first time since its launch a decade ago. 

During the first quarter of 2008 the US currency has fallen more than six per cent against a basket of currencies. It has dropped more than eight per cent against the euro and around seven per cent against the Japanese yen. This is not all doom and gloom, however, as where there are losers there are always winners. And these winners include some of the globe’s top brand names.

The benefit of this plunge has been two-fold – first it has made US exports cheaper and secondly it has given companies that are truly global businesses a timely boost from their non-US sales when they are converted into dollars.

This has helped earnings defy some gloomy estimates this month. For example, Goldman Sachs Group predicted “disappointing” results for US companies, saying they will probably cut profit targets through 2008 amid the US slowdown.

Profits at S&P 500 members are predicted to drop 13.7 per cent in the first quarter and 4.3 per cent in the second as credit-market losses and slowing economic growth drag down corporate earnings, according to data compiled by Bloomberg.

However, there have been some big winners from dollar weakness including McDonald’s, Coca-Cola, IBM, Google and Ebay. And it may continue to shield American companies from a slowdown in the US economy.

Currently, economic growth in Europe, China and Brazil is outpacing the United States, helping companies that get most of their revenue from abroad.

“You have a global economy that happens to be growing faster than that of the United States and a declining dollar that looks like it will continue to make new lows,” a leading New York portfolio strategist told Bloomberg. Investors are “overly bearish” and are overlooking the link between the dollar and global growth, he added.

Coca-Cola and IBM last week reported Q1 profits that beat analysts’ estimates, helped by sales in Europe and Asia. Both get more than half their sales abroad. Coke said revenue, fuelled by growth in China, India, Turkey and Mexico, jumped 21 per cent to $7.38 billion (Dh27bn), with nine percentage points of the increase coming from the dollar’s decline against other currencies.

IBM, the world’s biggest computer-services company, said that net income climbed 26 per cent in the first quarter as sales in Europe, the Middle East and Africa rose 16 per cent. Adjusting for the decline in the dollar, revenue from those regions rose four per cent, Bloomberg reported.

“There is demand for technology in geographies where growth rates are nothing short of spectacular, and that’s keeping the market for technology pretty robust,” said one senior US money manager.

Ebay said that the weak dollar contributed to a 32 per cent gain in overseas revenue in the first quarter, twice as fast as US sales. International sales make up 53 per cent of the California-based company’s revenue.

Google, owner of the most popular internet search engine, also saw international sales jump 55 per cent in the first quarter, beating analyst estimates. Without the change in currency rates, revenue would have been $202 million lower.

And McDonald’s showed its globalisation credentials with better than expected earnings on record European revenue gains despite the first drop in US store sales in five years. A Big Mac costs €3 ($4.80) in Amsterdam while in New York customers pay $3.29. It also sold more coffee in the United Kingdom, Big Tasty burgers in France and Shaka Shaka chicken sandwiches in Japan, signaling overseas markets will outperform the US for the third straight year, UBS Securities said. “The company is not recession-proof, but it is somewhat recession-resistant,” one fund manager said.

The dollar’s decline also added six per cent to earnings. Net income advanced 24 per cent to $946.1m, or 81 cents a share. The greenback’s weakness boosted profit by five cents a share. Europe is the company’s largest region by revenue, generating 42 per cent of first-quarter sales and 39 per cent of operating profit, McDonald’s said. The US contributed 47 per cent of earnings and 34 per cent of sales.

And iPod maker Apple on Thursday reported that overseas revenue rose 47 per cent.

“Despite the difficult macro environment, they were still able to show really strong growth,” said one analyst. For its second quarter ended in March, net profit rose to $1.05bn, or $1.16 per share, from $770m, or 87 cents per share, a year ago. Overall revenues grew by 43 per cent to $7.51bn.

The weak dollar bonus is unlikely to keep macro economic realities at bay forever. As disappointing earnings from other US corporates including online retailer Amazon and coffee maker Starbucks show that the American economy is facing much tougher times.
 

 

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