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Companies May Warn Of Currency Issues As Earnings Season Starts

By Debbie Carlson Kitco News
Thursday October 9, 2014 11:24 AM

(Kitco News) - The third quarter corporate earnings season starts Thursday, and equities’ recent fall from record highs set last month may have softened expectations regarding profit news.

Thursday’s Standard & Poor’s 500 stock index rally off the September Federal Open Market Committee meeting minutes notwithstanding, the equity markets as whole exited last month on a down note and that weaker sentiment leaked into October.

Stock-market watchers said there’s a bit of a cautious approach going into earnings season as a result.

“What was once a full-steam-ahead mentality has been supplanted with a wait-and-see mentality,” said Patrick O’Hare, chief market analyst at Briefing.com. “Will multinational companies stamp out concerns about the dollar's strength?  Will companies suggest the U.S. economy is gathering strength, such that it will be able to offset any weakness abroad?  Will companies be able to retain record-high profit margins? These are some of the pressing questions going into the reporting period and the answers will be provided soon enough.”

 Terry D. Sandven, chief equity strategist at U.S. Bank Wealth Management, concurred.

“To a degree, the upcoming reporting season remains a wildcard. While third-quarter results are expected to be generally at or above expectations, of mounting concern are the rising dollar and company outlooks for the fourth quarter and 2015,” Sandven said.

The U.S. dollar’s rally didn’t really start until the latter half of the third quarter, O’Hare pointed out, which is when the euro and the Japanese yen started to get hit hard. Thus, he said, comments about the U.S. dollar’s strength probably won’t be seen regarding the third-quarter performance. Instead, there might be warnings that if the dollar continues to gain, then this could act as a headwind in the future for some companies. O’Hare said that idea comes from the U.S. dollar index’s current value being much higher than where it was in the fourth quarter of 2013 and the first quarter of 2014.

Analysts at Barclays said revenue estimates don’t fully reflect the recent currency movements or the weakening global economic outlook.

“As is often the case, estimates have moved lower as earnings season has approached, although they do not yet fully reflect the implications of recent international economic weakness and foreign exchange translation,” they said.

As such, the Barclays analysts said they expect fewer companies to exceed sales expectations, but earnings-per-share beats may still occur.

“There is a relationship between movements in the dollar and the proportion of companies that exceed sales estimates. Therefore, we forecast that as low as 50% of companies will report sales that exceed consensus estimates. Despite this, history suggests that about 70% companies will still exceed EPS estimates,” they said.

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O’Hare said it’s important to remember that as the greenback flexes its muscles, it helped to pressure crude oil prices, which are dollar-denominated. That will support sectors where oil is a major input, he added.

“Lower oil prices have also translated into lower gasoline prices, which is a supportive factor for consumer spending. The dollar's strength will create some headwinds, but don't consider it a tornado that will wreck everything in its path,” he said.

The Barclays analysts said even though energy makes up only 10% of the market capitalization of the S&P 500 index, it accounts for 27% of capital expenditure spending by S&P 500-listed companies. “With WTI crude oil having fallen below $90 a barrel, we will be listening closely for commentary on energy-related capex spending,” they said.

Europe, China A Factor

Sandven said the weakening economic outlooks for Europe and China could be mentioned in corporate earnings news, too.

“Last’s week’s poor performance among the energy and materials sectors could be explained by deteriorating economic conditions in the eurozone and, perhaps to a lesser degree, in emerging markets, namely China. Should growth in these regions wane, that too would likely temper expectations for U.S. multinational companies with a European and emerging-markets footprint,” he said.

Although the U.S. dollar strength and weak global economic growth will likely factor into companies’ forward guidance, both Barclays and Sandven said they are leaving their year-end S&P 500 forecasts unchanged. Barclays lists its 2014 S&P 500 earnings-per-share estimates at $117, with a price target of 1975. Sandven said his year-end 2014 S&P 500 price target remains unchanged at 2,060, based on a price earnings multiple of 17.5 times their 2014 earnings estimate of $117.50.

For 2015, the outlook is softer, both Barclays and Sandven said.

Sandven said U.S. Bank’s preliminary 2015 outlook reflects earnings growth in the range of 8%.

The Barclays analysts said investors need to brace themselves, otherwise they may be disappointed.

“We do not expect the third quarter to be a positive quarter for forward guidance. In fact, we expect earnings and conference calls to lead to a reduction in 2015 estimates, which remain too high in our opinion, at 11% EPS growth,” they said.

By Debbie Carlson of Kitco News; dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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