More than Charmin Gets Squeezed at P&G
re-print from march 28th 2014 client publication
On February 11th Proctor & Gamble (P&G) released a statement revising 2014 earnings (EPS) guidance lower as losses stemming from Venezuela’s tiered currency devaluation in January and other currency losses wrought over $250mm in unexpected losses.
It appears management’s strategic move into emerging markets (EM) to offset waning sales in mature markets is now proving problematic hobbling a company known for their skill to profitably bridge the art of branding with the science of economics.
Business & Currency Risk
Last month’s EPS revisions by P&G resulted from currency devaluations in EM and is a window onto the delicate balance that exists among global interest rates, trade and exchange rates. These announced charges were a surprise as they were neither within management’s control nor factored into most investor models.
Quantitative Easing (QE) roils currency markets & stalls investment
Where P&G management evolved to deliver a consistent message across new channels, the FEDs varying guidance delivered through the blunt tool of QE has rattled global currency markets and directly cost companies like P&G hundreds of millions of dollars. All told, 2014 expected earnings (EPS) growth was cut to 3% from the 12% estimate announced less than a month earlier.
The bad news for investors is that P&G is not the only victim. IBM, Exxon and other S&P 500 companies posted losses based on devaluations in Venezuela and Argentina, among other currency-related losses.
QE has created many unintended consequences – January’s EM currency swoon being just one example. Unfortunately for P&G, and other US multinationals, losses associated with currency volatility (Sep 2013 GMM) will continue.
Evolve or Die…or Devalue?
We hope that Ms. Yellen will follow P&Gs example and evolve the FEDs tools to steady the flow of global investment and growth.
Compromising global trade and EPS is painful, however, our fear is that a No-Taper FED will potentially make the US Dollar / Charmin exchange rate = to 1.