Companies are losing many billions of dollars by not effectively managing their foreign currency exposures, according to the latest FiREapps Corporate Earnings Currency Impact Report.
“The net quarterly impact from currency volatility totaled at least $3.96 billion in losses,” FiREapps said in its report. This equates to an average of about 3 cents per share and $11.9 billion in currency losses for the first three quarters of 2013.
Why is this happening? It is really a combination of factors, said FiREapps CEO Wolfgang Koester. “This is a complex issue that is challenging to manage, and without increased visibility through the correct technology, it is difficult to achieve the right results,” he said. “By gaining better insight into their exposures, it is much easier for them to manage within the industry benchmark of $.01 EPS.”
Mr. Koester added that FiREapps is seeing “more and more companies” making the connection between FX impacts and EPS. “They also understand that this impact is not tolerable and that it can be properly managed with the proper solutions.”
The industries that were hit by currency volatility were victims of falling (mostly) emerging market currencies that likely dropped on the back of the Fed’s “taper.” The medical equipment & supplies, auto, chemical manufacturing, biotech & drug sectors were the industries hit hardest and mainly at the hands of the yen, the Canadian dollar, the Mexican peso, the Brazilian real and the Aussie dollar. FiREapps breaks down the impacts as follows:
In Auto, companies were impacted by the euro as well as the Brazilian real (which fell as much as 11%), the Canadian dollar (which fell as much as 3.3%), and the Mexican peso (which rose as much as 7% and fell as much as 6%).
In Medical Equipment & Supplies, companies were heavily impacted by volatility in the euro (which traded as high as 1.35 and as low as 1.28 in Q3), the yen (which traded as high as 96 and as low as 101), and the Australian dollar (which fell as much as 6.2% in Q3).
In Biotech & Drugs, companies were heavily impacted by the decline of the Japanese yen.
In Chemical Manufacturing, companies were impacted by the Brazilian real and the Japanese yen.
What can companies do to fix this for the coming quarters? FiREapps recommends CFOs acquire the ability to be able to quantify risk in terms of EPS. FiREapps said this is a “critical first step in actually managing currency risk to less than $.01 EPS.” They should also look use natural hedges and also use an external hedging tool, like FiREapps’ CoRE, which can help companies optimize external hedges.
FiREapps’ Mr. Koester thinks things are improving as CFO’s gain more weaponry to manage FX risks. “Due to the large impacts many corporates are experiencing, more and more CFOs are making this a front-burner issue and asking their organizations to focus on solving it,” he said. “Once they do so, they can implement solutions that will make significant improvements to their FX exposure management processes and produce results.”