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By Caroline Valetkevitch
NEW YORK, July 2 As an increasing number of
American companies warn their earnings will fall short of
expectations, many are pointing the finger at Europe as the
As the second-quarter corporate results season gets underway
in the next few weeks, the euro zone debt crisis, weak European
demand, the euro currency's decline and the impact of it all on
the global economic environment, will be front and center.
A Thomson Reuters study of 85 Standard & Poor's 500
companies that have warned investors their earnings would be
worse than expected in the quarter shows at least 20 cited
Europe specifically, 15 noted currency movements and 12 talked
more vaguely about uncertainty due to global economic
conditions. Most of the others were not specific or had more
unique or isolated problems.
Even the handful of big consumer products companies which
are saying that China's slowing economy is starting to hurt
their sales can also see the euro zone's hand in it all. Many
Chinese factories are being hit by reduced export demand - from
So while the news may have brightened somewhat at the end of
last week because euro zone leaders agreed on a series of
crisis-fighting measures, it won't take Europe - where many
economies are either in or close to a recession - out of the
corporate news headlines in the next few weeks at least.
"Europe is clearly a headwind impacting demand for goods and
services," said Kathy Karlic, group vice president at Wilmington
Trust Investment Advisors in Buffalo, New York. Wilmington Trust
manages $70 billion in assets.
Some 14 percent of all S&P 500 company sales come from
Europe alone, according to S&P data.
The overall effect is significant. The number of companies
that have said second-quarter results will be worse than
forecast outnumbers those who say the picture has brightened by
3.62 to 1 - the most negative it has been in almost 11 years,
according to Thomson Reuters data.
Companies that have cited Europe run the gamut, from
personal computer maker Hewlett-Packard (HPQ.N) to consumer
staples company Procter & Gamble (PG.N) and coffee chain
Last Thursday, Ford Motor Co (F.N) said its losses from
outside North America could be triple the $190 million posted in
the first quarter, largely due to the headwind from Europe.
Overall, S&P 500 second-quarter earnings growth is seen at
5.8 percent from a year ago, the data shows. But once you
exclude the stunning growth expected from Apple Inc (AAPL.O) and
unusual comparisons with a bad year-earlier quarter for Bank of
America (BAC.N), earnings are expected to decline 0.4 percent.
Revenue is seen up just 1.7 percent for the quarter, the data
Investors typically look to earnings reports to give stocks
a lift, but if guidance is any indicator, companies are feeling
a lot more pessimistic than optimistic.
The euro's weakness against the dollar has an immediate
translation impact on the dollar earnings of U.S. companies with
big European operations. It also tends to make U.S.-produced
goods less competitive overseas. In the second quarter, the euro
EUR= has fallen 5.2 percent against the dollar.
"We have a strengthening dollar, which is not going to be
good for multinationals that have foreign operations," said Jeff
Schwarte, U.S. equities portfolio manager for Principal Global
Investors in Des Moines, Iowa. The firm manages $258 billion in
Mike Kovar, chief financial officer at consumer accessories
company Fossil (FOSL.O), warned that the dollar's strength was
expected to reduce the company's second-quarter and full-year
Negative-to-positive guidance is the worst in the consumer
discretionary sector at 21-to-1.
That is despite an 18-percent decline in oil prices CLc1
in the second quarter, which is expected to have reduced energy
and material costs for corporations and consumers alike.
In its last quarterly report, Starbucks said it suffered its
first decline in same-store sales in Europe since 2009, with
particular weakness in Ireland and Germany. "The situation is
very, very tough," Chief Executive Howard Schultz said of
Another consumer discretionary company, Priceline.com
(PCLN.O) pointed to Europe and the decline in the euro in its
quarterly forecast, which warned of slower second-quarter
In the technology sector, Hewlett Packard, NetApp (NTAP.O)
and Applied Materials (AMAT.O) were among companies that cited
Europe in their outlooks.
"Europe is one tough place to do business right now, and my
personal prediction is that this is going to get a little bit
softer before it gets stronger," Hewlett Packard CEO and
President Meg Whitman said on the company's May 23 earnings
And it is not as if companies are getting a lot of
offsetting help from the rest of the world. U.S. economic growth
has failed to pick up momentum this year with U.S. gross
domestic product up at only a 1.9 percent annual rate in the
first quarter, data showed on Thursday. [ID:nL2E8HS2WT]
U.S. corporations' worries about China, though less severe
than fears about Europe, add to the dampened outlook for
overseas business. Persistent slowing demand, not just in Europe
and the United States but also in China, was behind a June 20
reduced forecast from Procter & Gamble.
Also, Nike Inc (NKE.N), which on Thursday reported earnings
below expectations for the quarter ended May 31, said advance
orders growth in greater China had dropped sharply from a year
(Reporting By Caroline Valetkevitch; Editing by Martin Howell,
Desking by G Crosse)
Keywords: MARKETS USA EARNINGS/EUROPE
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