A picture taken on November 7, 2017 shows people arriving at the headquarters of Nike Europe in Hilversum.
When athletic apparel giant Nike disclosed on June 27 that a strong U.S. dollar weighed on sales in its most recent quarter and the rising value of the greenback would keep pressuring sales in fiscal 2023, its shares sold off, and gave an early warning to a market already worried about the earnings outlook for the June quarter. That followed a warning from Microsoft that June-quarter sales would be $460 million lower for the same reason, shaving $250 million from profit.
Indeed, the dollar’s 11% gain this year against a basket of currencies – and 12% against the euro – is a looming problem as earnings season kicks into gear. Standard & Poor’s 500 companies get 29% of their sales from outside the U.S, according to Goldman Sachs. They typically sell those products or services in local currencies, then report financial results including those sales in dollars. So if Nike sells a pair of shoes for 100 euro, it was worth about $7 less at the end of its quarter than at the beginning.
The numbers aren’t massive in percentage terms – Microsoft’s miss works out to between 1% and 2% of earnings. But in a nervous market where companies’ stocks get punished for even small earnings misses, they are worth being prepared for, experts say.
The market’s drop this year has been about investors paying less for each dollar of corporate earnings, says Stacie L. Mintz, head of quantitative equity at PGIM Quantitative Solutions, a unit of Prudential Financial. Currency issues are one of several forces now threatening the earnings themselves.
“It’s important because it puts a cloud around earnings season, and this is an important earnings season,” Mintz said.
Currency is only one reason projections of earnings growth are dropping across the board. Expected June-quarter profit growth in consumer discretionary companies, for example, has fallen by more than half since March, as the market overall has seen projected growth slip to 5.2% from 6.3%, CFRA Research strategist Sam Stovall said.
The dollar has risen for the reason it often does during global economic weakness, seen as the world’s reserve currency, and the safest bet in town. Concerns about higher interest rates and the threat to stocks from an economic growth slowdown, if not an outright recession, have also prompted gains in the greenback.
The euro has borne the brunt of pressure in currency markets, with recession fears especially high in Europe due to the Russian invasion of Ukraine. Economic sanctions against Russia, including a bar on most Russian sales of natural gas to eurozone nations, have raised the cost of fuel and driven overall inflation to 8.6 percent over the last year.
Technology earnings and the dollar
The amount of pressure on earnings from currency swings will vary by company and by industry, depending on their mix of business.
In general, shares of companies that get most of their sales domestically have outperformed more-global businesses in 2022 by about 9 percentage points, according to a June 22 report by Goldman Sachs strategist David Kostin. U.S.-centric companies were down an average of 15%, as companies with higher percentages of foreign sales dropped 24%.
At 59% of sales, technology companies have the greatest exposure, according to Goldman. That’s especially true of semiconductor companies, but also affects consumer stocks like Apple and advertising-driven names like Meta Platforms and Alphabet, the parent companies of Facebook and Google, respectively. Materials companies in industries such as paper and chemicals are second at 50%, with health care, financial stocks and utilities having the lowest exposure among the 11 sectors in the market’s benchmark large-cap index.
Companies with high exposure to foreign sales include Qualcomm (96%), oilfield services company Schlumberger (85%), disability insurer Aflac (70%), Netflix and Meta (59%), and Alphabet at 54%.
Companies with high exposure to Europe will likely make the biggest adjustments to revenue for currency. These include Booking Holdings at 79%, Philip Morris International at 39% and aerospace supplier Hexcel at 44%.
None of those companies have recently signaled a drop in revenue or profit gains due to currency.
Tesla, Apple and overseas currencies
A couple of companies worth watching as this issue develops are Tesla, which gets a quarter of its sales in developing nations like China, and Apple, which gets 19% of sales in Greater China (including Hong Kong and Taiwan) and another 24% in Europe.
The bigger impact on Tesla, especially, will come from China’s zero-Covid policy, which shut down Tesla’s Shanghai factory for much of the quarter, Wedbush analyst Dan Ives said. At Apple, the impact will be greater in hardware than in the services business, and will be mitigated by Chinese government interventions to keep the yuan close to stable against the dollar, said CFRA Research analyst Angelo Zino.
“It’s going to be a [2 percent] to [3 percent] headwind to revenue for major tech players, and could accelerate in the second half,” Wedbush analyst Dan Ives said. “It’s going to result in numbers cuts, including for Tesla and Apple.”
The bigger impact for Apple may come in the September quarter, since the dollar has continued to rise since the end of June, Zino said.
“Given an environment where consumer spending may weaken, it could affect how Apple prices products in different parts of the world,” Zino said.
How companies fight currency volatility
The good news: Companies do have some ways to fight back against currency swings, and they tend to be short-lived.
At Nike, federal filings say currency hedging operations helped improve gross profit margins, recovering some of the lost revenue, and price increases also helped contain the damage.
Some companies, especially chip makers, can match their losses from selling in local currencies by manufacturing overseas, especially in Asia. That lets them recover some lost revenue in the form of lower production costs.
One thing that’s not likely to happen is U.S. companies moving operations back to the U.S. to manage currency risk, said CFRA analyst Zachary Warring, who covers Nike. Such moves take too long to plan to be effective against volatile currency swings, he said, though it could be one item on a list of reasons highlighted by the Covid pandemic for global companies to decrease reliance on Asia.
“You wouldn’t open factories because of a one-year swing in certain currencies,” he said. “The move now was so quick, and so extreme, it’s hard for companies to respond.”
For investors, the right plan is to be aware of how currency risk might affect companies where they own shares, Mintz said. To help them do that, finance executives have to communicate those risks early and clearly, she added.
“The more information investors have, the better decisions they can make,” Mintz said. “Err on the side of sharing.”