October 21, 2014 / 9:51 PM / 5 years ago

Strong dollar hurts profits of U.S. companies

NEW YORK, Oct 21 (Reuters) - The strong dollar is beginning to take a toll on U.S. companies with big businesses overseas.

Coca Cola Co and McDonald’s Corp on Tuesday became the latest multinationals to get sideswiped by the surging U.S. currency, which typically crimps demand for U.S. exports and reduces the value of overseas sales when they are translated back into U.S. dollars.

Coke, whose quarterly profit slumped 14 percent, said it now estimates that currency will have a 6 percentage-point negative impact on full-year operating income, and expects to come in below its long-term earnings per share target for 2014.

McDonald’s forecast currency to cut fourth-quarter earnings per share by 5 cents to 6 cents, after shaving 1 cent off third-quarter earnings per share.

Last week, Wal-Mart Stores Inc cut its annual sales forecast, pointing to a stronger dollar and the impact of food stamp reductions as the two main factors.

The effects have not been restricted to companies in the consumer space: IBM on Monday said it expected dollar appreciation to have a significant impact on its fourth quarter and 2015 results - one more negative element in a generally gloomy earnings report.

And United Technologies Corp on Tuesday cited the stronger U.S. currency in cutting its full-year profit forecast for its Otis elevators division, which generates a large chunk of its business outside the country, by about $50 million.

The U.S. dollar index, which measures the value of the greenback against a basket of currencies made up of United States’ major trading partners, rose 7.74 percent in the third quarter.

A one percentage point move in the dollar typically translates to a two percentage point impact on earnings, said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia.

NEW ENVIRONMENT

Corporations are having to adjust to a new environment after more than a decade of enjoying the benefits of a relatively weak dollar on their earnings, analysts said. That means investors can expect more changes to guidance going forward.

To be sure, the pain isn’t across the board. Apple Inc , which derives 60 percent of revenue from international sales, acknowledged that currency will be a headwind but did not seem overly concerned. The company forecast a strong December quarter after a higher-than-expected 16 percent jump in iPhone sales in the most recent quarter.

For Coke and McDonald’s, two brands struggling to reconnect with consumers, the robust U.S. currency is a further headache. Coke, like other soft drink makers, is grappling with nearly a decade of declines in domestic soda sales as people have become more health conscious. Meanwhile, McDonald’s has been losing share among the coveted millennial demographic to more upscale brands like Chipotle Mexican Grill Inc.

“When other things aren’t going well, you don’t need that added to the mix,” said Mike O’Rourke, chief market strategist JonesTrading in Greenwich, Conn. “I think what we’re going to see over the next quarter or so are just a resetting of expectations.”

That could tempt some companies to emphasize currency headwinds and downplay deeper problems with operations, said O’Rourke. But there is a downside: “When the truth eventually comes out, investors usually punch the stock.” (Additional reporting by Lisa Baertlein in Los Angeles, Lewis Krauskopf and Daniel Bases in New York, Nandita Bose and Nathan Layne in Chicago)

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