Google, GE Hit by the Euro-SPX Connection: Is This the Big New Theme for Earnings Season?
The weak euro has begun to take its toll on US companies, claiming two victims this morning.
Now, despite your feelings about the long-term impact of a declining currency, as a US investor, you should be hoping for the dollar to weaken versus the euro.
In less than 24 hours, we received weak earnings reports from two of America's biggest companies: Google (GOOG) after the close yesterday, and General Electric (GE) this morning.
And as it turns out, both missed revenue expectations due to unfavorable foreign-exchange trends, which pretty much means, euro too weak, dollar too strong.
Here's what Google Chief Financial Officer Patrick Pichette had to say on yesterday's earnings call:
Google missed top-line estimates by about $300 million, and that means much of the weakness relative to expectations came out of foreign exchange.
Our gross revenue grew 25% year-over-year to $10.6 billion, 9% quarter-over-quarter growth. By the way, it's worth noting that although currency rates had an immaterial impact year-over-year, they, in fact, had a negative impact on revenue quarter-over-quarter. In fact, if we applied last quarter's exchange rates to our Q4 revenue, these would have been roughly $240 million higher. So FX is a key component here.
As for GE, in this morning's press release, it simply said "revenues were negatively impacted by lower Ending Net Investment (ENI) at GE Capital, FX and slower growth in Europe."
Check out this chart, which tracks the S&P 500 (^GSPC) vs. the EUR/USD (FXE) over the past 10 years:
(click to enlarge)
Now we can have a correlation/causation argument all day along, but the reality is that the weak dollar has been a boon to US corporate earnings, particularly companies that export heavily, like Caterpillar (CAT) and Boeing (BA).
And today, we're seeing two major US companies take a hit on the dollar's strong performance vs. the euro in the fourth quarter.
Now, we've been tracking the potential impact of a weak EUR/USD on fourth-quarter earnings in the Buzz and Banter -- which you can access for a week completely free -- since December 15, when Accenture (ACN) took down its full-year guidance due to unfavorable F/X trends.
And on January 11, we threw out this thought:
Now, the general correlation between stocks and the EUR/USD seemed to break down toward the end of the fourth quarter, which you can see in this chart:
If the EUR/USD continues to weaken, uncertainty and slackening demand won't be the only euro-based problems -- F/X translation will hit US companies on the bottom line.
And if companies were rewarded for a weak dollar on the way up, they could most definitely be punished for a strong one on the way down.
However, it's clear that in addition to the demand problems and investor psychology issues created by European uncertainty, any weakness in the EUR/USD creates a fundamental problem that hits earnings, or at the very least, creates a convenient boogie man for companies putting up lousy numbers.
Either way -- the Euro/SPX connection is in play, and will turn into a big story this earnings season.
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