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Companies Say Negative Impact From FX Outweighing Trade War

While the Q2 earnings season "unofficially" began Friday with JP Morgan's beat on both the top and bottom-line estimates, roughly 5% of S&P 500 companies have already released their quarterly results. And a FactSet analysis of company earnings calls revealed that while American companies have made much more noise about the destabilizing impact of President Trump's trade war, currency-related factors have been cited much more frequently as having had a negative impact on company performance. In its analysis, FactSet searched for specific terms related to a number of factors ("currency", "China", "trade" etc) in earnings call transcripts. The company then looked to see if the factor was said to have had a negative or a positive impact on earnings.

Crates

Of the 23 firms whose calls were analyzed, 12 said FX-related factors had a negative impact in Q2, or are expected to have a negative impact in future quarters. US firms, particularly those that derive a significant portion of their revenues abroad, have been complaining about the impact of a strengthening US dollar, which erodes profits earned abroad when they're converted back into dollars. The next four negative factors were "cost-"-related - that is, costs related to raw materials, transportation, labor and oil/gas. With oil prices climbing and transportation costs moving higher (while wage growth continues to lag inflation) 14 companies cited at least one negative cost-related factor during their earnings calls.

FactSet

When it comes to tariffs, it's interesting to note that the term "tariff" has been mentioned during the earnings calls of six S&P 500 companies to date. However, only one - Lennar - said the tariffs would have a direct negative impact.

Here's what companies are saying (earnings call excerpts courtesy of FactSet):

Tariffs

"Given our progress in these and other categories, we're on track to meet or exceed our 2019 target of $265 million of direct construction cost synergies. We expect to accomplish this despite the backdrop of serious industry headwinds of a tight labor market, elevated lumber prices and international trade tariffs." -Lennar (Jun. 26)

FX / Currency

"And currency volatility remains significant and causes us to be deliberate with our pace of investment. Moves in the foreign currency rate of greater than 5% from one quarter to the next are common." -AutoZone (May 22)

"Importantly, in regard to Q1 guidance, exchange rates have moved from a 3% revenue tailwind to now being a 1% headwind from the last time I gave guidance. That is a 4% negative move, which impacts revenue in Q1 by about $300 million. It also impacts EPS negatively by $0.03." -Oracle (Jun. 19)

"While I'm on the topic of fuel and currency impact, for those of you who are modeling 2019 using June guidance fuel price and FX rates, the impact of higher fuel prices and the stronger dollar would unfavorably impact 2019 by $0.14." -Carnival (Jun. 25)

"Margin will be negatively impacted by approximately 35 basis points from FX but we expect to deliver our 100-basis point margin expansion target normalized for FX." –IHS Markit (Jun. 26)

"For the full-year, gross margin contracted just under 80 basis points as strong underlying product profitability was more than offset by a 90 basis point headwind from foreign exchange." -NIKE (Jun. 28)

"So, there are really two components. So, FX was a small headwind to GP in Q1, but it was a larger headwind at operating income because we have – as the peso weakened in the quarter and we had to reval our peso receivables with the biggest one being our VAT receivable, there was a reasonably sized SG&A drag on our beer business. So, again, at the operating income line, it was a larger drag than it was at the GP line." -Constellation Brands (Jun. 29)

Higher Costs (Materials, Freight, Labor, Oil, etc.)

"On the cost front, I've highlighted the past few quarters the impacts we are experiencing from accelerated pressure on wages. Those pressures continue to exist and are much more than historical norms." -AutoZone (May 22)

"I think in the food and sundries side, it's [inflation] picked up a little bit. And again, in talking to the buyers, a big chunk of that has to do with freight. And I think one of the analyst reports out there and the title was called frieghtening changes to cost…And I think on the food and sundries side, it was up in the 2% to 3% range. And probably two-thirds of X was more related to the freight-related costs." -Costco (May 31)

"Restaurant labor was unfavorable 90 basis points, as continued wage pressures, workforce investments, and Cheddar's brand mix offset pricing and productivity gains." -Darden Restaurants (Jun. 21)

"While I'm on the topic of fuel and currency impact, for those of you who are modeling 2019 using June guidance fuel price and FX rates, the impact of higher fuel prices and the stronger dollar would unfavorably impact 2019 by $0.14." -Carnival (Jun. 25)

Then again, as Morgan Stanley's Ellen Zentner explained in a recent client note, the negative impact from increased protectionism likely will be delayed, or even preceded by a mini-boom, as companies rush to stockpile supplies before the new levies are imposed. Afterwards, the fallout will be immediate and painful. Earlier, BlackRock's Larry Fink pointed out that the next $200 billion round of tariffs are still only words...and there's still time for Trump and China to agree to some kind of detente, though China has apparently done everything in its power to shut down these rumors.

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