Impact of FX on company equity performance

[kwayker22]

Hey folks,
In the following publishment (courtesy of user "dealmaker" in his recent post "key metrics"):

https://www.factset.com/hubfs/Resou...k/Earnings Insight/EarningsInsight_101218.pdf

Negative impact on earnings and revenues for Q3 2018 has most frequently been attributed to Foreign Exchange as opposed to other sources(from analysis of 24 S&P500 company conference calls) as can be seen on the graph on page 2.

Am writing to inquire how currency exchange rates impact company performance in this regards. What exactly does a "FX headwind" mean? Fairly new to this as you could probably tell; any feedback is much appreciated

Thanks

 

[HobbyTrading]

Let's do a simplified textbook example:
you are a USA machine manufacturer. You sell your machine to a European customer and have an agreed sales price of 1 million Euro per machine.
In Q2 is the exchange rate 1 Euro = 1.20 USD, so the sales value in your company books is 1.2 million USD.
In Q3 is the exchange rate 1 Euro = 1.15 USD, so the sales value in your company books is 1.15 million USD.

Comparing Q3 with Q2 you see that the sales value in your books has reduced by 50 k USD, even though you sold the same amount (1 machine per quarter). Likewise has your profit margin also reduced by 50 k USD, assuming that your cost to manufacture the machine has not changed.

The above example shows what the influence is of exchange rate on sales. A similar example could be made for the costs of purchasing the materials to produce the products it sells.

 

[kwayker22]

Let's do a simplified textbook example:
you are a USA machine manufacturer. You sell your machine to a European customer and have an agreed sales price of 1 million Euro per machine.
In Q2 is the exchange rate 1 Euro = 1.20 USD, so the sales value in your company books is 1.2 million USD.
In Q3 is the exchange rate 1 Euro = 1.15 USD, so the sales value in your company books is 1.15 million USD.

Comparing Q3 with Q2 you see that the sales value in your books has reduced by 50 k USD, even though you sold the same amount (1 machine per quarter). Likewise has your profit margin also reduced by 50 k USD, assuming that your cost to manufacture the machine has not changed.

The above example shows what the influence is of exchange rate on sales. A similar example could be made for the costs of purchasing the materials to produce the products it sells.

Makes a lotta sense, thanks!

 

[Sig]

Let's do a simplified textbook example:
you are a USA machine manufacturer. You sell your machine to a European customer and have an agreed sales price of 1 million Euro per machine.
In Q2 is the exchange rate 1 Euro = 1.20 USD, so the sales value in your company books is 1.2 million USD.
In Q3 is the exchange rate 1 Euro = 1.15 USD, so the sales value in your company books is 1.15 million USD.

Comparing Q3 with Q2 you see that the sales value in your books has reduced by 50 k USD, even though you sold the same amount (1 machine per quarter). Likewise has your profit margin also reduced by 50 k USD, assuming that your cost to manufacture the machine has not changed.

The above example shows what the influence is of exchange rate on sales. A similar example could be made for the costs of purchasing the materials to produce the products it sells.

All true and a good example. But given the fact that it would be trivial for the company to enter into a forward contract to hedge most of that exposure, it's a bit of bullshit to blame poor financial results on that. Either you're admitting that as a Fortune 500 company you don't have anyone at your company with even a basic understanding of international businesses, you're admitting that your Fortune 500 company was engaged in forex speculation by not hedging your exposure, or you're insulting all our intelligence by making up a bullshit reason for your corporate underperformance, which most likely has nothing to do with forex exposure. I'm going with the third option, maybe a little of the second. Also thinking it may be a good strategy to short a basket of the companies that use this excuse while going long an equal amount in their sector.

 

[HobbyTrading]

All true and a good example. But given the fact that it would be trivial for the company to enter into a forward contract to hedge most of that exposure, it's a bit of bullshit to blame poor financial results on that. Either you're admitting that as a Fortune 500 company you don't have anyone at your company with even a basic understanding of international businesses, you're admitting that your Fortune 500 company was engaged in forex speculation by not hedging your exposure, or you're insulting all our intelligence by making up a bullshit reason for your corporate underperformance, which most likely has nothing to do with forex exposure. I'm going with the third option, maybe a little of the second. Also thinking it may be a good strategy to short a basket of the companies that use this excuse while going long an equal amount in their sector.

I tend to agree that you would expect large companies to somehow hedge their forex exposure. However, this excuse is something that I see so often being mentioned that I wonder whether these companies actually do take an effort to hedge. Maybe they don't hedge and don't mention "FX tailwind" wen they profit from it, but only mention "FX headwind" when they suffer from it. It is also not a new excuse: I have seen it being used for at least twenty years.