One of the more significant trends playing out through earnings season thus far has been the evident weakness in year over year international revenue growth of large multinational firms. The weak economic backdrop internationally accompanied by a strong U.S. dollar has created a difficult operating environment for large multinational corporations.
The U.S. dollar has not looked back since it began moving higher in mid-2014 due to speculation about potential Fed rate hikes. The economic outlook when comparing the United States to international counterparts such as Japan or Europe could not have diverged more in that time period. When domestic companies operate overseas, a strong dollar creates a significant earnings headwind. The foreign revenues must be converted back to dollars when reporting profits, so depending on the amount of business done the adverse moves in exchange rates can have a meaningful impact.
One illustration of this was Johnson & Johnson's report earlier in the week. The company was able to beat earnings expectations but revenues fell short of analyst expectations. Fourth quarter sales for the multinational conglomerate grew by 7.4% in the United States from the same period a year ago. At the same time international revenues simultaneously fell by 6.7%. The drop in international revenues came from two major sources. JNJ actually reported 1.2% growth in operating revenues on a year over year basis. The company still saw an uptick and modest growth despite a poor global economy. The big hit came through negative currency impact which impacted foreign revenues negatively to the tone of -7.9%.
Johnson & Johnson said Tuesday that if exchange rates hold, the damage to its earnings would be two or three times what the company had projected in October. This is a solid illustration of the environment most global firms are facing in the current environment.
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