Wednesday, May 12, 2010

The euro ate my profits


The euro ate my profits


NEW YORK (CNNMoney.com) -- The euro's plunge against the dollar this year may be bad news for big American companies. And that may not be priced into the market just yet.

Online travel kingpin Priceline.com, for example, reported strong revenue and profit growth for the first quarter Monday, but the stock is down 14% Tuesday due to disappointing guidance for the second quarter.


Priceline said the weakening euro was one reason why earnings won't match analysts' initial expectations. The travel halt in Europe due to the Iceland volcano isn't helping either.

Now you might be wondering why the debt drama with the PIIGS is a big deal for Priceline (PCLN), a company known mainly in the U.S. for those wacky TV ads featuring William Shatner of "Star Trek" fame.

Well, the majority of Priceline's gross airline and hotel bookings actually come from its international Booking.com business -- and a big chunk of that is from European travel. Because the dollar is rallying against the euro, sales from any businesses conducted in euros is reduced when translated back into stronger dollars.

Priceline laid it out pretty bluntly in its quarterly earnings filing with the SEC Monday night, saying that if the euro remains around current levels for the rest of the year, results from its European business will be "adversely impacted."

Keep track of the euro and other currencies
Of course, currency fluctuations are nothing new. All multinationals deal with exchange rate risk and most hedge it appropriately enough so that currency moves don't impact sales and profits too badly.

But this isn't your average currency swing. The euro has dropped 6% against the dollar in just the past month and is down 11% on the greenback so far this year. Those are significant moves in the usually slow-moving currency markets.

"If the euro hadn't moved from $1.50 to $1.26 in a short period of time this wouldn't be an issue. Day-to-day fluctuations are typically not a concern," said Andrew Corn, chief investment officer of equities with Beacon Trust, a money manager in Summit, N.J.

In addition, the debt fears could have a more tangible impact on actual demand for Priceline.

"Destabilization of the European economy could lead to a decrease in consumer confidence, which could cause reductions in discretionary spending on services such as leisure travel," the company said.

In other words, continued turmoil in Europe could really hurt big American companies because it could lead to more than just short-term pain from exchange rate shifts. It could actually cause a slowdown in real sales and profits.

With that in mind, it's going to be very important to see what two of the bluest of blue chips have to say about Europe when they report their latest results in the next few days.

Entertainment giant Walt Disney (DIS, Fortune 500), which has a big theme park presence in Paris, will release its fiscal second quarter earnings after the bell Tuesday while networking titan Cisco Systems (CSCO, Fortune 500) is set to report its fiscal third quarter results on Wednesday afternoon.

Both companies generate a significant chunk of their business from Europe. In fiscal 2009, which ended last September, Disney reported that revenues and operating profits from Europe accounted for about 17% of its total sales and operating income.

Meanwhile, Cisco said that revenue and gross profits from Europe made up about 20% of the company's total in its fiscal second quarter.


0:00 /3:22American economy not a Greek tragedy
If either of them issue warnings because of the gyrations in the euro or concerns that Europe's woes may cause consumers and businesses to pull back on spending, that could be another reason why stocks will have a tough time building on Monday's massive rally.

Still, the big question for investors is this: Will any currency and earnings woes tied to Europe's porcine pentagon (tired of calling that group of five countries the PIIGS over and over again so hoping my new nickname sticks) be a one-quarter phenomenon or more than just a short-term blip?

Several analysts reiterated their "buy" recommendations on Priceline Tuesday, arguing that the stock's drop was an overreaction.

Doug MacKay, chief investment officer with Broadleaf Partners, an investment firm based in Hudson, Ohio, said the $1 trillion aid package for Greece and other troubled European nations unveiled over the weekend should be enough to avert a global crisis along the lines of Lehman Brothers in 2008.

"A lot of companies in the second quarter will say that Europe is weak and point to the chaos there. Investors need to be mindful of that but they don't need to panic," he said. "Hopefully, the latest bailout efforts will mean the weakness is more of a one-time event."

But Keith Springer, president of Capital Financial Advisory Services, a Sacramento, Calif.-based investment advisory firm, is skeptical.

"There is no question that companies are relying on demand in the U.S. to counter weakness in Europe," he said. "But currency fluctuations are definitely going to have an impact. This is a major problem. The world is in denial about the increased amount of debt in Europe."

And MacKay conceded that some consumer staples companies, which normally would be good defensive bets in a time of economic turmoil, may ironically be companies to steer clear of because of exposure to Europe.

He did not mention specific companies, but a quick look at the earnings statements of some of the Dow's biggest consumer companies show who could be at risk.

Coca-Cola (KO, Fortune 500) generated 17% of its total sales from Europe in the first quarter while nearly a quarter of Kraft's (KFT, Fortune 500) first quarter sales were from Europe. McDonald's (MCD, Fortune 500) may face the biggest problems though -- 40% of total revenue came from Europe in the first quarter.

That's a lot of Royales with Cheese.

source: cnn.com

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