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Euro Slide Adds Fuel to Turnaround in European Earnings

European companies from Sanofi (SAN) to Deutsche Telekom AG stand to benefit this year as the euro’s slump to a nine-year low against the dollar bolsters profit growth.

While the slide reflects the weaker economic outlook in the 19-country euro region relative to the U.S., it also provides a windfall for companies that sell in the U.S. Goods from the region now cost less in dollars, while products imported from the U.S. are more costly. U.S. revenue for European companies also is worth more when converted to euros.

The euro’s drop “is good news because it helps exports from Europe to other markets, or at least prevents imports to Europe,” Carlos Ghosn, chief executive officer of French carmaker Renault SA, told reporters yesterday in Rio de Janeiro.

The currency move is adding fuel to a turnaround in corporate profits that analysts are forecasting. Earnings for the Euro Stoxx 50 Index (SX5E) — a benchmark of 50 big companies in the euro region — dropped 3.8 percent last year. Analysts predict an increase in European earnings this year.

Sanofi, France’s biggest drugmaker, gets almost a third of its revenue from the U.S., where it sells the Lantus diabetes treatment and other medicines. Every 1 percent drop in the euro versus the dollar adds 0.5 percent to earnings per share, the Paris-based company said in October.

T-Mobile US Inc. (TMUS), the fourth-largest U.S. mobile-phone carrier, accounts for about 29 percent of sales for its parent company, Deutsche Telekom. Two suitors bid to buy T-Mobile last year, only to have the talks fail, meaning Deutsche Telekom will continue to benefit from the dollar’s strength. The company reports earnings for the U.S. division in both currencies to show the exchange-rate effect.

Euro’s Peak

The euro fell to as low as $ 1.1802 yesterday, its weakest level since January 2006. At its 2014 peak in March, a euro bought $ 1.3934. The drop accelerated at the end of 2014 and in the first days of the new year on growing expectations the Federal Reserve will raise U.S. interest rates and the European Central Bank will begin large-scale government bond purchases. The currency also fell on concern Greece may leave the euro area.

At the same time as the euro slumps, companies in the region also are getting a boost to their bottom line from the decline in oil prices.

“Definitely a weaker euro, with lower energy prices, is supportive of corporate profits,” Alvin T. Tan, a foreign-exchange strategist at Societe Generale SA in London, said in a telephone interview.

To be sure, the weakness in the euro isn’t all good. The cost to import components increases, as can the expense of producing outside the euro region.

Higher Costs

The weakening euro means that Infineon Technologies AG, for example, faces higher costs in countries such as Malaysia, where it makes wafers, millimeter-thin discs of semiconductor material such as silicon that are used as the basis for circuits. Neubiberg, Germany-based Infineon generated almost 50 percent of sales in foreign currencies in the year ended Sept. 30, with the dollar accounting for the largest portion.

Companies that borrow in dollars and report earnings in euros now also face a higher debt load. Deutsche Telekom’s net debt increased by 2.7 billion euros in the first nine months of last year, in part because of the weakening euro.

Corporate executives would say a weaker euro is no substitute for a more vibrant economy.

“In the short term, the weak euro may have some benefits, especially for exports, but in the long term we should all work together to improve the European economy, which would also strengthen the euro,” Daimler AG Chief Executive Officer Dieter Zetsche said in an interview yesterday in Las Vegas.

To contact the reporter on this story: Phil Serafino in Paris at [email protected]

To contact the editors responsible for this story: Jacqueline Simmons at [email protected] Benedikt Kammel

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