Hewlett packard - Currency Exchnage Rate to The Rescue
I know that I keep hammering away at this point. But it is hugely critical, especially when this core benefit disappears.
Far too many companies are meeting their sales and earnings growth targets mainly because the dollar is weaker and that exaggerates the strength of overseas earnings.
We can predict when this comes to an end - January 2009. Specifically, we can say that EPS growth will be negative for most international companies. Live by the sword, die by the sword.
Here's what I mean.
If we consider the year-over-year gain of the Euro versus the dollar, we can see a general trend towards a stronger Euro. Starting in September of last year, the Fed began emergency rate cuts. That made the Euro stronger by comparison and the rate of strengthening accelerated from a benign 7% to ~18% in 6 months.
That is, the Euro surged in value 18%. Since that time it has weakened and is only 9% more valuable than it was same time last year.
That is not a small thing: it accounted for 50% of HWP's Sales growth.
http://biz.yahoo.com/ap/080819/earns_hewlett_packard_summary_box.html?.v=2
"sales rose 10 percent -- 5 percent if adjusting for currency fluctuations"
Eliminate the currency exchange rate issue, and HP's growth is barely positive.
Return to the slide and we see that, indeed, that currency rate advantage is going away.
Scenario #1: Euro stays flat. Already the Euro/USD rate is approaching that of last year. A flat rate would eradicate most of HWP's growth.
Scenario #2: Euro weakens. Less likely but always a possibility. In this case, HWP sales growth goes negative.
Scenario #3: Euro strengthens. Possible. After all, I suspect that it is weakening only because of Central bankers bluff and no actual moves.
Regardless of which scenario we consider, the days are almost over for the currency impact on EPS. This will be a major surprise for too many investors. And that is a negative for the Bulls.
Far too many companies are meeting their sales and earnings growth targets mainly because the dollar is weaker and that exaggerates the strength of overseas earnings.
We can predict when this comes to an end - January 2009. Specifically, we can say that EPS growth will be negative for most international companies. Live by the sword, die by the sword.
Here's what I mean.
If we consider the year-over-year gain of the Euro versus the dollar, we can see a general trend towards a stronger Euro. Starting in September of last year, the Fed began emergency rate cuts. That made the Euro stronger by comparison and the rate of strengthening accelerated from a benign 7% to ~18% in 6 months.That is, the Euro surged in value 18%. Since that time it has weakened and is only 9% more valuable than it was same time last year.
That is not a small thing: it accounted for 50% of HWP's Sales growth.
http://biz.yahoo.com/ap/080819/earns_hewlett_packard_summary_box.html?.v=2
"sales rose 10 percent -- 5 percent if adjusting for currency fluctuations"
Eliminate the currency exchange rate issue, and HP's growth is barely positive.
Return to the slide and we see that, indeed, that currency rate advantage is going away.
Scenario #1: Euro stays flat. Already the Euro/USD rate is approaching that of last year. A flat rate would eradicate most of HWP's growth.
Scenario #2: Euro weakens. Less likely but always a possibility. In this case, HWP sales growth goes negative.
Scenario #3: Euro strengthens. Possible. After all, I suspect that it is weakening only because of Central bankers bluff and no actual moves.
Regardless of which scenario we consider, the days are almost over for the currency impact on EPS. This will be a major surprise for too many investors. And that is a negative for the Bulls.
posted by Andrew at
8:31 PM
2 Comments:
Andrew,
You didn't elaborate on scenario #3. In this case also US global companies will benefit.
I think I can summarize your conclusions thus:
1) US stays weak, global economy (Euro/emerging markets) recovers and is strong - Good for US Multinationals.
2) US recovers, global economy falls into recession (I think unlikely) - but still good for US MN
3) US weak, globe weak - No one is immune.
Thanks.
I think that investors are clinging to two falsehoods
1. US will recover soon (or, at least, as the first to weaken, we will be the first to recover)
2. Europe and Asia are still strong
I actually think that the market will crash when they realize that both are false and a global recession hits hard.
In essence, your #3.
Post a Comment
Subscribe to Post Comments [Atom]
<< Home