At Earnings Season's End, Weak Dollar Means Strong Results

As earnings season draws to a close, U.S. companies' upbeat results have the weak dollar to thank.

Large U.S. companies with sizeable overseas operations reported that the dollar's slide against other currencies helped them, as money earned abroad was converted into more dollars when repatriated back to the U.S.

Currency translation benefits could be seen across the board for U.S. exporters. Campbell Soup Co. (CPB) reported on Monday that its earnings were up 11% for the quarter. That included the impact of exchange rates, which contributed to both a 7.9% rise in profits for the baking and snack businesses and a 7% lift in international soup, sauces, and beverage revenue.

Clothing retailer Abercrombie & Fitch Co. (ANF) on Wednesday also reported a higher-than-expected profit for the quarter, citing a higher gross margin of 62.7% due to currency benefits, among other factors.

For S&P 500 companies, "earnings definitely came in much stronger than expected for the first quarter and one of the factors was positive currency translation," said Alexander Young, international equity strategist at Standard & Poor's. "Clearly the weak dollar helped corporate America exceed consensus earnings."

The largest American companies fared better in the first quarter of 2011 than investors expected. Analysts' consensus forecasts put earnings growth at 13% for S&P 500 companies heading into the quarterly earnings season; by the end of the reporting period, the analysts were expecting 19% earnings growth, according to Consensus S&P's CapIQ.

The dollar index traded at 75,887 in New York on Tuesday. Since the Federal Reserve began pumping money into the U.S. economy as part of its quantitative-easing program, slated to end in June, the dollar has been falling, weighed by supply.

U.S. regulations don't require companies to report their international revenue separately, and only half the companies in the S&P 500 do so. For those companies, Europe tends to be the biggest foreign source of revenue, Young said.

Sectors such as energy, materials, and industrials, which all reported good earnings this quarter, also tend to have the largest global footprints, Young said.

The current quarter, which will finish at the end of June, should also show positive currency effects for American companies, Young said, noting that while the trade-weighted dollar index has had an average level of 75 during the quarter, companies will be comparing their results to the second quarter of 2010, when the index averaged 84. "This positive currency translation is persisting," he said.

While the dollar's long-term malaise has been good for companies that sell American products abroad, the same economic forces are pushing up prices at home, which can have a mixed effect on companies' U.S. operations. "A weak dollar promotes inflation in the U.S. because it lowers Americans' purchasing power," Young said.

-By Chana R. Schoenberger, Dow Jones Newswires; 212-416-4803; chana.schoenberger@dowjones.com

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