December 4, 2022

Cadbury Chocolates, a Mondelez brand, run with a production line in a factory in the UK

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Simon Dawson / Bloomberg

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The dollar just keeps rising, a problem for the profits of large US companies. As earnings season approaches, select stocks are particularly vulnerable.

The greenback has certainly burst higher lately. This should come as no surprise, given that the Federal Reserve is raising interest rates—aggressively—and faster than other central banks—in order to reduce inflation by limiting demand in the economy. The yield on U.S. Treasury debt now offers the best return on inflation expected in more than a decade, giving investors a reason to buy dollars to snap up those bonds.

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If that weren’t enough, geopolitical and economic conditions are uncertain, to say the least, adding to the appeal of American wealth as a haven.

The result is that the US Dollar Index (ticker: DXY), which measures the dollar against a basket of currencies, including the beaten-up British pound, is up more than 17% for the year. According to Dow Jones market data, the index recently broke above the range it had traded in for most of the summer and has now made 23 multi-decade highs this year.

The dollar’s bounce is expected to impact US earnings because sales made overseas represent less revenue when companies translate them back into a stronger greenback. According to Morgan Stanley, there is a direct, inverse correlation between the dollar and earnings for companies in the S&P 500: When the buck rises, analysts lower their earnings forecasts for more U.S. companies.

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Looks like it’s playing out now. according to factset,
The analysts’ consensus forecast for total 2023 earnings per share in S&P 500 companies has fallen nearly 4% over the past three months. Sure, part of the decline is due to declining economic growth, but part of it is related to the higher dollar.

Stocks of companies that make up a higher-than-average share of their overseas sales are particularly vulnerable.

Philip Morris International (PM) is a prime example. S&P 500 . Almost all of its sales come from overseas.‘s
About 40% according to FactSet. Already, the analysts’ consensus call for the cigarette seller’s 2023 EPS is down about 23% since the end of February, while the stock is down about 23% since that month’s peak.

But it’s possible that more EPS cuts are on the way, especially as the dollar has bounced in the past week. Investors will get an update on the situation on October 20, when the company reports earnings. CEO Jacek Olzak told baron’s The company can manage costs to protect its earnings from rising dollars, but overall the risk to strong buck profits remains.

Mondelez International (MDLZ) is in a similar boat because nearly three-quarters of its sales come from outside US analysts’ consensus calls. 2023 EPS has fallen nearly 16% from its 2022 peak, and the stock is down 15% from its peak. Peak for the year around the same time. Mondelez is due to reveal its results on November 1.

Meanwhile, Booking Holdings (BKNG) sells about 86% outside US estimates for its 2023 EPS, which has held steady throughout the year, while the stock is down 28%, including a decline in the past week as the buck strengthened. Is. Its earnings are due on November 2.

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Lam Research (LRCX) is also exposed to a stronger dollar: More than 90% of its sales come from overseas. Analysts have cut EPS estimates for next year by about 16% from the end of February, while the stock is down 47% this year. Lam’s earnings report is scheduled for October 19.

Mondelez, Booking and Lam did not immediately respond to requests for comment.

Things could get worse for all these companies and the market in general. 22V Research’s Dennis Debuschere described the dollar’s strength as a growing challenge to revenue growth for S&P 500 companies, with earnings coming under pressure from slowing demand.

“Companies with high foreign sales exposure are most at risk,” he wrote in a research note.

Write to Jacob Sonenshine at [email protected]