Over the last 2-3 years analysts have finally got their teeth into the impact of FX swings on company results. Now they look for it, worry about it and they don’t give up until they understand it. 

The last FiREapps analysis of the earnings calls of  846 publicly traded companies – that have at least 15% or more international revenues in at least two currencies, reported that analysts asked more detailed questions – about emerging market currencies and others – than in any other quarter recorded, for example:

• Constance Marie Maneaty - BMO Capital Markets U.S. asked Colgate-Palmolive CEO, “Are there people that you consult about this [foreign exchange]? I'm just wondering if this is a media construct or if it's something you're seriously dealing with.” Sadly he replied, “I think, my experience over the last 5 years with foreign exchange is that everybody knows after the fact.”
• William Schmitz - Deutsche Bank AG, Research Division, asked Kimberley A. Ross’s CEO, “It's Deutsche Bank. I know you don't want to give guidance for the full year, but can you just take a stab at what you think the currency impact is going to be, both in the top line and the bottom line?”
• Keith F. Bachman - Analyst, BMO Capital Markets U.S., asked Apple’s CFO, “I was hoping you could peel off a little bit and talk about the foreign exchange impact and the higher deferrals. Is there a way to quantify that impact on the guidance in March in particular?”

Emerging markets

In Q4 2013, there were 96 companies reporting impact from emerging market currencies in the fourth quarter. No specific industry was particular impacted to a greater or lesser degree. FiREapps commented, “No one gets a free pass.”

Earning surprises affect stock price

FiREapps analysis showed that the average earnings per share (EPS) hit at the companies disclosing EPS impact was $0.03 in the fourth quarter, which is large and material. The report also showed that the stock price is affect disproportionally, depending on whether the reported earnings are positive or negative in relation to the predicted earnings, viz:

• if positive - above predicted earnings, the share price rises by 1% on average
• if negative - below predicted earnings, the share price falls by 5% on average

FiREapps angle

FiREapps believe that FX hedging should be at the operational level, i.e. in the transaction level in the ERP A/R and A/P which is where the real exposure risks lie. Hedging should not be at the reporting level, e.g. a retailer may report its results in USD but the FX exposure lies in all the currencies use. It is the transaction currency exposure that should be managed. 

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CTMfile take: This research underlines how critical it is to operate an effective currency hedging programme based on transactional exposures to avoid unexpected currency impacts on business results. Companies that use transaction FX exposure management have around 1¢ EPS currency exposure, unlike many companies where the FX exposure is 40¢ EPS or more.