Do Earnings Views Adequately Account for Dollar Impact?

Wall Street analysts may be inadequately accounting for the dollar's sharp first-quarter rally, setting up a scenario in which some multinational companies may miss already low earnings estimates and be punished with selloffs of their shares.

Equity analysts admit their trouble keeping up with the dollar's rapid 9 percent rise so far this year. While companies have issued forecasts mentioning "currency headwinds," most Wall Street analysts are not updating their estimates to reflect those rapidly moving exchange rates.

That could hurt. North American public companies could give up more than $25 billion in revenues and 7 cents per share in earnings in the first quarter alone because of currency-related volatility, said Wolfgang Koester, chief executive of FiREapps, a foreign exchange data analytics firm in Phoenix, Arizona.

Monsanto Co <MON.N> is one early example in which analysts failed to keep up with currency fluctuations. On Jan. 7, before the dollar's biggest moves of the quarter, the agricultural product company had estimated the changes would reduce 2015 earnings by 15 to 20 cents, similar to 2014, when the greenback rose 12.8 percent against major currencies.

Yet only five of 25 analysts cut their estimates for Monsanto between the time it closed the books at the end of February and its April 1 report, Thomson Reuters data show.

On Wednesday, Monsanto reported earnings and revenue that missed analysts' estimates for its fiscal quarter ended Feb. 28 and said it now expects the dollar's rally to cut 35 to 40 cents from its full-year earnings per share. [ID:nASB09EBF] Earnings for the quarter came in at $2.90 per share, below the $2.93 analysts had expected, according to Thomson Reuters I/B/E/S.

"The chance of U.S. earnings coming through lower (than estimates) is noticeably high," said Chris Faulkner-MacDonagh, market strategist at Standard Life Investments in Edinburgh, a global asset manager with $383.6 billion under management. "You're going to really feel it this quarter and next."

While not every analysis that fails to account for the dollar's rise will miss its mark, even some on-target companies find the lack of currency-based analysis disturbing.

Investor relations experts at Red Hat Inc <RHT.N> said consensus forecasts are "dubious at best" because of the lack of revisions, a complaint also raised by the software company's chief financial officer in its March 25 conference call.

"The rapid devaluation of nearly every foreign currency versus the U.S. dollar is not news, yet surprisingly only about 30 percent of the sell-side analysts who follow Red Hat have updated their models at current rates," Red Hat CFO Charles Peters said.

Analysts contend that it is nearly impossible to quantify currency headwinds if companies give little detail about their hedging strategies or the expected revenue and earnings break-down for different currency regions.

"Currency moves faster than the Street's ability to publish updated estimates," said Ed Maguire, an analyst at CLSA in New York.

He and other analysts, such as Daniel Ives, who covers software for FBR Capital Markets in New York, cited challenges to their models posed by the dollar's volatility.

"Analysts are trying to play a game of darts with a blindfold depending on the granularity provided by a respective management team," said Ives. "The massive volatility has made this a difficult situation for both analysts and management teams."

(Reporting By Sinead Carew; Editing by Linda Stern and Richard Chang)