Back in a 90s dollar-strength cycle, companies were pointing the finger at the dollar for earnings weakness.
The late January earnings season is chock full of companies reporting earnings hits due to the dollar’s strength. Pfizer, DuPont, P&G, and Caterpillar and many others are blaming the buck for weaker earnings and dim outlooks. It was the same case nearly twenty years ago when companies were just starting to see overseas revenue picking up. Back then, International Treasurer thought that “blaming the dollar” was a hollow argument.
“Given the simplicity of the argument that the same foreign sales translate into lower dollar earnings as the dollar rises, citing currency effects is a convenient card to play in the game of Wall Street earnings expectations,” International Treasurer wrote in its April 28, 1997 issue. “’Blaming the dollar,’ for example, looks to be currently in vogue with pharmaceutical firms (highly dollar sensitive).”
The story goes on to list several of those companies, all of whom describe in some way the earnings hit, be it an “unfavorable exchange rate comparison” or “continued negative exchange-rate developments” or an “unfavorable effect of foreign exchange.”
“Implicit in statements about currency impacts is the notion that currency risk is uncontrollable,” International Treasurer wrote, speculating that some of it may have to do with protecting the company from litigation when it gives forward-looking guidance. Just two years earlier the US government had instituted the US Private Securities Litigation Reform Act of 1995 concerning “forward-looking” information and to protect companies from frivolous lawsuits. Currency fluctuations were now put on companies’ 10-Ks as items beyond their control that could materially affect future results.
Still, as is known today, hedging translation cost isn’t done regularly, either because it’s not worth it or just too speculative. Most companies these days are hedging specific transactions (interco payables or receivables, etc) so that they can get the appropriate hedge treatment and keeps gains/losses off the income statement and on the balance sheet.
And if it’s an earnings hit and you’re a big company, it’s not the end of the world; if it didn’t really affect the underlying business itself, why bother? And hedging isn’t cheap either, as many in the NeuGroup universe of treasury peer groups has noted.
InternationalTreasurer1997Apr28 Dollar Strength by itreasurer