Higher Global Exposure Means Steeper Earnings Declines For S&P 500 Companies by John Butters, FactSet
“This past quarter, the effects of currency movement were slightly less than expected with a 1% to 2% headwind in most revenue categories including 1% to total revenue and a $0.01 headwind to earnings per share.” –Oracle (June 16)
“In comparing our third quarter results year over year, there are a few items of note. As usual, FX. As compared to a year ago during the quarter, the foreign currencies in the countries where we operate weakened overall versus the U.S. dollar, primarily in Canada, Mexico and Korea. This resulted in our foreign earnings in Q3 when converted into U.S. dollars for reporting purposes being lower by about $15 million or $0.03 a share than they would have been, had the various foreign exchange rates versus the dollar been flat year over year.” –Costco (May 26)
Coming into the start of the Q2 earnings season, there are concerns in the market about the impact of the stronger U.S. dollar (relative to last year) and the impact of lower global economic growth on the sales and earnings of companies in the S&P 500. Based on estimates as of today, are companies in the S&P 500 with more global exposure expected to report weaker sales and earnings growth relative to companies in the index with less global exposure for the quarter?
The answer is yes. FactSet Geographic Revenue Exposure data (based on the most recently reported fiscal year data for each company in the index) can be used to analyze global sales exposure for all the companies in the S&P 500. For this particular analysis, the index was divided into two groups: companies that generate more than 50% of sales inside the U.S. (less global exposure) and companies that generate less than 50% of sales inside the U.S. (more global exposure). Aggregate earnings and revenue growth rates were then calculated based on these two groups.
The estimated earnings decline for the S&P 500 for Q2 2016 is -5.2%. For companies that generate more than 50% of sales inside the U.S., the estimated earnings decline is -2.8%. For companies that generate less than 50% of sales inside the U.S., the estimated earnings decline is -9.9%.
The estimated sales decline for the S&P 500 for Q2 2016 is -0.8%. For companies that generate more than 50% of sales inside the U.S., the estimated sales growth rate is 2.5%. For companies that generate less than 50% of sales inside the U.S., the estimated sales decline is -9.0%.
For the second quarter, the Energy sector is projected to be the largest contributor to the year-over-year declines in both earnings and revenues for the index. If the Energy sector is excluded from the analysis, are companies in the S&P 500 (ex-Energy) with more global exposure expected to report weaker sales and earnings growth relative to companies (ex- Energy) in the index with less global exposure?
The answer is still yes.
The estimated earnings decline for the S&P 500 (ex-Energy) for Q2 2016 is -1.7%. For companies (ex- Energy) that generate more than 50% of sales inside the U.S., the estimated earnings growth rate is 0.1%. For companies (ex- Energy) that generate less than 50% of sales inside the U.S., the estimated earnings decline is -5.3%.
The estimated sales growth rate for the S&P 500 (ex-Energy) for Q2 2016 is 2.2%. For companies (ex- Energy) that generate more than 50% of sales inside the U.S., the estimated sales growth rate is 4.6%. For companies (ex-Energy) that generate less than 50% of sales inside the U.S., the estimated sales decline is -4.3%.
Thus, S&P 500 companies with higher global exposure are expected to report lower earnings growth and lower revenue growth relative to S&P 500 companies with lower global exposure for the second quarter. When excluding the Energy sector from the analysis, the conclusions remain the same.
Read more about earnings trends in this edition of FactSet Earnings Insight. Visit www.factset.com/earningsinsight to launch the latest report.
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