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Dollar slump 'good news for corporate earnings’

New York, October 10, 2009

Next week investors could get the clearest indication yet of whether revenues are growing again for US companies as a number of bellwethers are likely to see a benefit from the dollar's weakness.

The earnings diary features companies like chip maker Intel Corp, International Business Machines and General Electric Co that stand to benefit the most from the US dollar's steep decline in the third quarter.

'We ought to see favorable currency translation for revenues and on the bottom line, and what that's going to do is set the tone that this is going to be an OK earnings season,' said Fred Dickson, market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

More than 70 per cent of Standard & Poor's companies beat earnings expectations in the second quarter on hefty cost cutting, allowing the market to rally throughout the summer.

But investors have been eager to see an improvement in corporate revenue.

The major indexes rose sharply this week, with the Dow industrials ending at a fresh 2009 closing high and the S&P 500 Index up 58 per cent from its early March low, as optimism about third-quarter earnings took hold.

Results from aluminum company Alcoa Inc underscored the positive mood when the company beat expectations on both earnings and revenue late Wednesday.

Third-quarter earnings for S&P 500 companies are expected to decline about 25 per cent from a year ago, compared with a decline of 27 per cent for the second quarter, according to data from Thomson Reuters.

S&P 500 companies' revenue is expected to fall 11.4 per cent in the third quarter from the year-ago period versus a 14 per cent drop in the second quarter, Thomson Reuters data showed.

Translation: Ka-Ching!

Analysts have been speculating about the impact of the US dollar, which stands at 14-month lows against other currencies, on earnings since a big chunk of S&P 500 companies' sales come from overseas. That typically means better numbers when the overseas sales are translated into dollars.

'Clearly some industries are more exposed to the international trends than others, and it may add to the rising earnings expectations,' wrote Tobias Levkovich, chief US equity strategist at Citigroup, in a research note.

Within the S&P 500, 56.5 per cent of total sales for information technology companies come from overseas, the highest of any S&P sector, he said. Both IBM and Intel are included in this group.

Intel is expected to report revenues of $9.015 billion, which would be a 12 per cent decline from the year-earlier period, according to Thomson Reuters I/B/E/S. In August, Intel raised its forecast for third-quarter revenue to $8.8 billion to $9.2 billion, spurring a rally in tech shares.

Investors have bet on a strong quarter for the chip giant, as the stock is up more than 25 per cent in the last three months, based on renewed demand in Asia and other recovering economies.     The weak dollar's impact is probably not included in analysts' estimates for the third quarter, which means more chances for upside surprises, Dickson said.

He noted it's tough to calculate the dollar's impact on earnings, particularly since some companies are involved in hedging against the dollar.

Jason Trennert, chief investment strategist at Strategas Research Partners in New York, said, it's early in the season to say how much of an impact the dollar had on the quarter, 'but it will undoubtedly help. There are no two ways about that.'

Among other companies scheduled to report next week are a number of top financial firms, including Citigroup Inc, Goldman Sachs, Bank of America Corp and JPMorgan Chase & Co.

Internet giant Google and pharmaceutical company Johnson & Johnson are also set to report results. – Reuters




Tags: Dollar | New York | earnings | weak |

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