Get 40% Off
These stocks are up over 10% post earnings. Did you spot the buying opportunity? Our AI did.Read how

Strong European currencies eat into company profits

Published 17/04/2014, 15:12

By Tom Bergin and Martinne Geller

LONDON (Reuters) - As European policymakers consider action to stop a strong euro holding back jobs growth, companies across the continent say the currency's strength is already eating into their profits.

Some of Europe's largest companies including Danone, 4:SAPG and L'Oreal have posted buoyant first-quarter sales volumes in the past week thanks largely to strong demand in emerging markets such as Brazil and in North America.

But when converted into euros, revenue has often fallen suggesting it will be hard for firms to sustain the strong profit growth of 2013 that helped drive the region's tentative recovery.

Some executives say their companies can live with current exchange rates but others are not so sanguine and are looking to European Central Bank President Mario Draghi for action.

"A strong euro is clearly hurting our business, but it's not a given that the trend for 2014 will be the same we saw last year... it will depend on what Draghi will do," Valerio Battista, chief executive of Italian cable maker Prysmian said on the sidelines of a shareholder meeting on Wednesday.

Draghi has said a euro that was too strong was not good for growth and could warrant further monetary easing.

Even before Draghi's most recent comments, analysts polled by Reuters earlier this month said they expected the euro to drop sharply in 2014. However, forecasters have been wrong-footed for a year by the euro, which was 2013's best performing currency.

European leaders including France's President Francois Hollande have also said they are concerned about the strength of the euro, which makes exports more expensive, thereby putting companies which sell their goods and services overseas at a competitive disadvantage.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

Germany's SAP, a major exporter of software, warned on Thursday that the impact of currency moves was worsening and would shave 5 percent off 2014 operating profit.

It also means profits earned overseas are worth less when brought home.

French supermarket chain Casino posted an 8.3 percent rise in first-quarter sales on a constant-currency basis but a 3.3 percent drop in actual euro revenue.

Some companies are looking to cut costs to help offset currency losses.

Finnish retailer Stockmann said on Tuesday it would cut up to 330 jobs, as it sees no improvement in the country's economic performance.

But analysts say there are risks to reacting to foreign- exchange movements, which are generally beyond companies' control and may reverse themselves quickly.

"Most companies realize that FX is something you just have to live with," said Societe Generale analyst Chas Manso. "If you want to succeed long-term, you just have to keep on going as best you can. If you take your foot off the pedal, for sure there will be someone else who doesn't and you will lose market share and profits."

British companies including fashion group Burberry and engineer 1:SMIN, also reported pressure from the strong pound, although UK policymakers seem to be more comfortable with the currency's level because the country is not a major exporter and the current exchange rate helps dampen inflation.

FORECASTS CUT

Analysts knew the firm euro and pound, which have risen against the U.S. dollar, Japanese yen and various emerging market currencies over the past year, would weigh on earnings, but some have been surprised by the extent.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

The double-digit profit growth needed this year to justify current high share prices is looking increasingly precarious, analysts say.

"The market had underestimated the FX headwind which was significant," Alex Howson, equity analyst at Jefferies said of yoghurt and baby milk producer Danone, in a note to clients. He added the larger-than-expected currency impact could prompt the brokerage to cut its earnings forecasts for the French company.

Analysts have been cutting their estimates for earnings in recent weeks. In the past 90 days, there has been a net 5.0 percent cut in estimates of earnings for companies in the DJ Stoxx 600 index of major European companies, based on 8,416 revisions to individual company forecasts, Thomson Reuters data shows. The trend has continued in the past month and week.

Some investors believe earnings estimates may need to be revised down further.

"I met many company managers last week and most of them criticised the sell-side analysts over the forex issue saying their euro-dollar forecasts are wrong… If it's true it means the analysts are overestimating companies' results and this could cause some disappointment in the market," a Paris-based asset manager said.

(Additional reporting by Alistair and Smout Ben Hirschler in London, Alexandre Boksenbaum-Granier and Dominique Vidalon in Paris, Silke Koltrowitz in Zurich and Massimo Gaia in Milan; Editing by Erica Billingham)

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.