U.S. Stocks Are Sinking in International Waters

by Dan Burrows | August 16, 2012 7:00 am

A stronger dollar is hurting corporate revenue[1] in the second quarter, but as Deere & Co.’s (NYSE:DE[2]) latest results show[3], good old-fashioned demand ain’t there, either.

Deere, the world’s biggest seller of big agriculture machines like tractors and combines, blew Wall Street’s quarterly earnings and sales forecasts — and cut its outlook, too — mostly because China, India and Argentina aren’t buying as much equipment.

That’s partly because of drought in South America, but mostly it’s because of the global economic slowdown. Asia has cooled off, while the European Union and eurozone are actually shrinking.

It all adds up to bad news for U.S. companies with lots of international sales. The relative strength of the dollar wasn’t doing them any favors, and as Deere’s results demonstrate, volume is slowing, as well.

The stronger dollar is enough of a problem, taking a toll in more ways than one. It not only makes U.S. goods more expensive overseas — which exacerbates the problem of already weak demand — but it also cuts into revenue when companies exchange weaker currencies into stronger dollars.

Indeed, the hit from currency exchange has been felt far and wide this earnings season. Pfizer (NYSE:PFE[4]) said unfavorable forex sliced 3% off revenue during the second quarter. Merck (NYSE:MRK[5]) took a 5% hit. DuPont (NYSE:DD[6]) saw forex depress revenue by 3%.

The list goes on and on, but unfavorable foreign exchange is only part of the problem.

Weakness in Europe and Asia are pressuring sales, and that would be the case even if the dollar were softer. Gross domestic product in the EU ran at 2.4% in the first quarter of 2011, according to FactSet Economics, and fell to 0.1% in the first quarter of 2012. As for the second quarter, GDP shrank by 0.2% in both the EU and eurozone, according to Eurostat.

At the same time, the big emerging markets of Brazil, China and India have slowed markedly. China’s GDP is down to 8.1% from a year-ago growth rate of 9.7%. India fell to 4.1% from 9.7%. Brazil went to 0.7% from 4.1%.

No wonder revenue for S&P 500 companies is growing just 0.8% this earnings season[7], and the forecast is even worse. As of June 30, the third-quarter revenue growth estimate for the S&P 500 stood at 1.7%, according to FactSet.

Today, it stands at zero.

No, the dollar’s not helping with top-line growth, but as Deere shows, the real problem lies in global weakness.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Endnotes:
  1. is hurting corporate revenue: http://investorplace.com/2012/07/strong-dollar-is-slicing-corporate-sales/
  2. DE: http://studio-5.financialcontent.com/investplace/quote?Symbol=DE
  3. latest results show: http://investorplace.com/2012/08/should-i-buy-deere-3-pros-3-cons/
  4. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  5. MRK: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRK
  6. DD: http://studio-5.financialcontent.com/investplace/quote?Symbol=DD
  7. growing just 0.8% this earnings season: http://investorplace.com/2012/08/get-ready-the-earnings-floor-is-set-to-fall/

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