A few days ago, Factset published a note analyzing 4Q2105 earnings for the two-thirds of the S&P 500 that had reported as of that time. It wanted to find out two things:
–how the sharp decline in the price of energy, especially oil and gas, had affected revenue and earnings of the S&P, and
–how the strength of the dollar affected the results of companies with substantial overseas revenues, earnings and assets.
Three observations (from me):
–the oil and gas figures, which show a general collapse in earnings, are a mix of operating results and writedowns of long-term investments in what are now no longer viable exploration/development projects (in plainer words, the balance sheet cost of finding the hydrocarbons exceeds their market value). Factset doesn’t separate operating earnings declines from writedowns—which would be a pain in the neck to do—even though the distinction is important
–companies may have hedged either currency or oil/gas price fluctuations. If successful, these hedges would have meant the reported results were better than unhedged would have been. If unsuccessful, the opposite would be the case. (Even farther afield, companies typically disclose unsuccessful hedges, thinking investors will focus on the unhedged results; no one calls attention to successful hedges, for the same reason.)
–products and services sold abroad are typically priced in local currency. When that currency falls against the dollar, the dollar-denominated results for a US-based company fall as well. As a matter of course, the US company can raise its local currency prices. But the general rule of thumb is that they can be boosted by, at most, the local inflation rate—and with a time lag, as well. In the case of the euro, which is the currency of most concern to the S&P 500, there is no inflation at present. So (ex hedging, if any) current results show the full brunt of the euro’s decline against the greenback.
The Factset numbers:
–for all S&P companies, revenues fell by 3.7% during the quarter. Earnings fell by 3.6%. For companies with more than half their sales in the US, revenues were up by 0.8% and earnings by 2.7%. For firms with more than half their business abroad, revenues were down by 13.0%; earnings were off by 11.2%.
–for the S&P 500 ex Energy, sales were up by 0.5%; earnings for non-energy firms rose by 2.5%. Domestically oriented companies ex Energy, had revenue gains of 3.9% and an earnings increase of 6.9%. Sales for foreign-oriented firms fell in dollar terms by 7.4% and earnings by 3.2%.
–I think the euro has already bottomed against the dollar. If so, ex hedges, 2016 results may be surprisingly good for S&P firms with significant EU exposure.