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P&G Revises Earnings Forecast Downward; Currency Fluctuations Taking a Toll

One perennial danger for multinational corporations working in developing countries is that they’re vulnerable to wild currency fluctuations that devalue earnings when brought  home and converted back to dollars. Mostly as a consequence of plunging currencies in emerging economies, P&G is forecasting much more modest earnings for 2014 than previously expected.

P&G’s trouble begins with a steep drop in the value of the Venezuelan bolivar. In January 2013, the Venezuelan government decided to devalue its own currency, already down 32 percent from last year. Now, P&G has no choice but to readjust its Venezuelan balance sheet to accommodate for the new price of the bolivar, costing the company between 8 and 10 cents a share, or as much as $280 million for the third fiscal quarter. Previously, P&G had calculated its earnings on the assumption that one U.S. dollar is worth 6.3 bolivares; however, as a result of the Venezuelan government’s deliberate deflation, the U.S. dollar is now worth 11.4 bolivares. And since Venezuela’s state-run currency is a floating rate, there is potential in the future for even more of a downward adjustment.

And P&G’s woes don’t end with the bolivar. There were also recent devaluations of the Turkish lira, Argentine peso, South African rand, Russian ruble, Ukrainian hryvnia and Brazilian real. The Argentine peso, in particular, has been a sore spot for P&G, declining precipitously to 8 pesos per dollar, a 20 percent decrease. Even the process of translating local financial statements over and over again has proven to be a substantial drag on overall performance; analysts at P&G estimate that this alone will shave an additional percentage point off its earnings in 2014.

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The sum result of all these currency revaluations is considerable for P&G. The company’s newly revised forecast for sales growth in 2014 is about 2 percent, a sharp departure from its prior estimate of 3 percent to 4 percent. Also, it lowered its earnings-per-growth forecast to 3 to 5 percent, way down from its earlier expectation of 5 to 7 percent. A statement issued by P&G said, “Foreign exchange is now expected to be a 9% core earnings per share growth headwind for fiscal year 2014.” The total negative imprint of all the various currency swings could be worth as much as 15 cents a share for P&G.

P&G isn’t the only company suffering from the pendulum swings of foreign currencies. Nik Modi of RBC Capital Markets, speaking to CNBC, said, “We remind investors that neither Clorox, Colgate or Energizer had included a devaluation of the bolivar in their guidance. We believe these companies may follow suit in the near future and update their outlook for changes in the exchange rate in Venezuela.” Also, Ford Motor, Co., Whirlpool Corp., Avon, and Colgate-Palmolive, Tupperware and Estee Lauder are other major companies that are particularly exposed to Venezuela’s currency shifts.

There are other currency variables spelling trouble for companies like P&G, heavily entrenched as they are in developing countries. For example, the U.S. dollar is widely expected to strengthen as the Federal Reserve gradually winds down its ambitious stimulus program. In anticipation of the U.S. dollar gaining and emerging currencies declining, it’s likely more multinational companies will hedge their foreign currency exposure with various financial instruments and even raise the prices of their products. Currency deflation in the third world can lead to price inflation in the first world.

In response to the news of its revised earnings projections, P&G’s share prices dropped 0.5% to $78.45 on February 11. Calculated on a year-on-year basis, its shares are still up 2.9%.