Which Factors May Negatively Impact Revenue and Earnings Growth in Q4?

As of today, the third quarter earnings season is nearly finished. During each corporate earnings season, it is not unusual for companies to comment on subjects that had an impact on their earnings and revenues in a given quarter or may have an impact on earnings and revenues in future quarters. Given the many concerns in the market, did companies in the Dow 30 discuss specific factors that had a negative impact on earnings or revenues for the third quarter or are expected to have a negative impact in future quarters during their earnings conference calls?

To answer this question, FactSet searched for specific terms related to a number of factors (i.e. “currency,” “China,” etc.) in the conference call transcripts of the 30 DJIA companies that conducted third quarter earnings conference calls to see how many companies discussed these factors. FactSet then looked to see if the company cited a negative impact, expressed a negative sentiment (i.e. “volatility,” “uncertainty,” “pressure,” “headwind,” etc.), or discussed clear underperformance in relation to the factor for either the quarter just reported or in guidance for future quarters.

Most Commonly Cited Factors

Foreign exchange was cited by the largest number of DJIA companies as a factor that either had a negative impact on earnings or revenues in Q3 or is expected to have a negative impact on earnings and revenues in future quarters. Twenty of the 30 DJIA companies (67%) cited this factor. Most of these companies did not cite a specific currency that devalued relative to the U.S. dollar. Of the companies that did mention a specific currency, four companies cited the lira (Turkey) and the peso (Argentina) while three companies cited the real (Brazil) and the euro.

Raw material and other inflation costs were cited by the second highest number of DJIA companies at 11 (or 37%).

It is interesting to note that the term “tariff” was mentioned during the earnings calls of 10 DJIA companies, with five of these 10 companies citing a negative impact linked to tariffs. However, even these five companies stated they were able to mitigate or would be able to mitigate some (if not all) of the negative impacts of the tariffs. 

What Are Companies Saying?

“Specifically, we expect revenue growth in the high-single digits, albeit at the lower end of that range as operational upside will likely be somewhat offset by FX headwinds.” -NIKE (Sep. 25)

“We are projecting constant currency adjusted EPS growth of 7% to 12% in fiscal 2019. Our currency assumptions result in an adverse EPS impact of approximately $0.04. This leads to an adjusted EPS range of $6.40 to $6.70 in reported dollars, and we will tighten the range during the course of the year.”   -Walgreens Boots Alliance (Oct. 11)

“First on revenue, on revenue as you've seen in our supplemental charts, the dollar continues to go against us and strengthen against foreign currencies. And right now, on revenue, we see about a 2-point currency headwind here in the fourth quarter, pretty consistent by the way with the third quarter.” -IBM (Oct. 16)

“Worldwide sales were $20.3 billion for the third quarter of 2018, a 3.6% increase versus the third quarter of 2017. On an operational basis, sales were up 5.5% as currency had a negative impact of 1.9%.” -Johnson & Johnson (Oct. 16)

“Third quarter revenues of $10.1 billion grew 10% on an FX-adjusted basis. With this growth, again, driven by a well-balanced mix of growth across discount revenue, fee revenue and net interest income, I would point out that the FX-adjusted growth rate now exceeds our reported growth of 9% given the strengthening of the U.S. dollar against the major currencies in which we operate.” -American Express (Oct. 18)

“Moving to the bottom line, core earnings per share were $1.12, up 3% versus the prior year. Foreign exchange was a $260 million earnings headwind, about $0.10 a share.” -Procter & Gamble (Oct. 19)

“Foreign currency, net of hedging, reduced per share earnings by $0.08 as the U.S. dollar strengthened against many currencies throughout the quarter. For the full year, we now expect an earnings headwind from foreign currency of minus $0.05 per share versus a prior estimated benefit of $0.10, or a reduction of $0.15 per share versus previous expectations.” -3M (Oct. 23)