Europe debt crisis takes toll on corporate profits

Companies are awaiting a resolution in Europe. Photo / AP

Europe's debt crisis is putting pressure on corporate earnings globally with companies from Procter & Gamble to Danone cutting forecasts and signalling profits will fall at more firms this year.

Analysts predict members of the Standard & Poor's 500 Index in the United States will report a 1.1 per cent average drop in second-quarter earnings, after estimating a gain as recently as last month, according to data compiled by Bloomberg.

That would be the first decline in 11 quarters after a 6.2 per cent average increase in the first quarter. A stronger US dollar is another threat to earnings as US exports become more expensive.

In Asia, the chairman at computer manufacturer Compal Electronics said last week that concern about a global slowdown is making him less optimistic about the second half of the year.

Paris-based Danone lowered its 2012 profitability forecast as Spaniards switch to cheaper brands of yoghurt.

"There is a lot of trepidation about second-quarter earnings," Tim Ghriskey, chief investment officer of Solaris Group in New York, said.

He oversees about US$2 billion ($2.5 billion).

"You are very unlikely to see companies coming out with favourable outlooks given the problems in Europe and the slowing growth in the US and China."

The recession that has hit at least eight of 17 countries in the euro region is hurting demand for all types of products.

FedEx, an economic bellwether because it transports products from phones to pharmaceuticals, last week predicted full-year earnings that trailed some analysts' estimates.

Philip Morris International, the world's largest publicly traded tobacco company, anticipates second-quarter shipments in the European Union would tumble as much as 9 per cent, hurt in part by Spain's almost 25 per cent jobless rate.

"It's the economy, the unemployment," Andre Calantzopoulos, Philip Morris's chief operating officer, told analysts.

"It's the austerity measures."

Those measures, which include eliminating 150,000 civil service jobs in Greece and cutting €11.5 billion ($18.3 billion) from the country's budget, have curbed spending by consumers and businesses.

In Germany, Europe's largest economy, business confidence has fallen to the lowest in more than two years, a sign the crisis may be spreading as leaders grapple with bailing out Greece, Spain and Italy.

P&G, the world's largest consumer-goods company, cut its earnings and revenue forecasts last week for the second time in less than two months.

For the fiscal fourth quarter ending this month, earnings per share excluding some items will be as much as US79c, down from a previous forecast for a maximum of US85c, Cincinnati-based P&G said.

A year earlier, P&G reported adjusted earnings of US84c a share.

"There's been slow to no GDP growth in developed markets and significant levels of unemployment in the United States and in Europe," chief executive Robert McDonald said at a June 20 investor conference in Paris.

The company, whose brands include Tide detergent and Gillette razors, also attributed the reduced forecast to currency losses as overseas earnings carry less value when converted into dollars.

The US dollar has gained 6.5 per cent against seven major currencies since April 30, according to the Federal Reserve's US Trade-Weighted Major Currency Dollar Index.

Also, for the first time in 13 years, the real, ruble and rupee are weakening the most among developing-nation currencies, while the yuan has depreciated more than in any other period since its 1994 devaluation.

New York-based Philip Morris cut its full-year earnings forecast to from US$5.10 to US$5.20 a share, from an April prediction of US$5.20 to US$5.30, citing the dollar's strength.

The maker of Marlboro cigarettes generates all of its sales outside of the US.

Philip Morris "is just a canary in the coal mine for many others who are going to use currencies as an excuse or legitimate reason" for declining profit, said Mark Luschini, chief investment strategist for Philadelphia-based Janney Montgomery Scott, which manages about US$54 billion.

Adding to executives' concerns, US hiring shows no signs of a rebound this year, Federal Reserve officials said last week in reducing their projections for 2012 growth.

The Federal Reserve pared its estimate for US 2012 gross domestic product growth to from 1.9 per cent to 2.4 per cent, down from a 2.4 per cent to 2.9 per cent prediction in April.

Passenger airlines are also suffering. While Europe's three biggest carriers have avoided giving specific forecasts for 2012, the International Air Transport Association almost doubled its loss prediction for European airlines to US$1.1 billion.

Europe's debt crisis has led Taipei-based Compal Electronics to become more conservative, according to chairman Rock Hsu.

Compal is the world's second-largest contract maker of laptop computers, with clients including Dell, Hewlett-Packard and Asustek Computer.

"Compared to three months ago we're not as optimistic toward the second half because market conditions are not as strong," Hsu said.

"We didn't originally expect any growth from Europe, yet we're now worried that conditions there will flow through to impact Asia."

The S&P 500 Index has tumbled 5.9 per cent since hitting a four-year high on April 2, and the MSCI World Index has slumped 9 per cent during that same period.

Europe's crisis may worsen unless leaders agree on a unified plan for the region, according to Dan Akerson, chief executive of General Motors, the world's largest automaker.

The situation in Europe is "at best stable", Akerson said.

"My expectation is that if Europe experiences a recession, I think the US can kind of manage its way through it.

"If there were divides in the union, if the euro were to go away, then I think it's anybody's guess what the implications would be for the US, for the rest of the world, quite frankly," he said.

- Bloomberg