Europe and Asia weakness dents US earnings

US corporate revenue growth slowed considerably in the second quarter due to weakness in Europe and Asia and a strong dollar.

While the US economy is growing at a sluggish 1.5 per cent with unemployment still stuck above 8 per cent, most companies missing revenue estimates blamed Europe's fiscal crisis and austerity measures as well as stuttering growth in emerging markets, notably Asia and Latin America.

The consensus estimate of second-quarter revenue growth had been trimmed from a projected 4.9 per cent at the beginning of the year to 4.7 per cent at the beginning of April. However, as the reporting period has progressed, analysts have revised their estimates further downward to an average 0.9 per cent, according to Thomson Reuters.

Less than half of companies to have reported second-quarter numbers performed better than expected. The number of companies beating revenue estimates has dropped below 50 per cent in only four other quarters: the first quarter of 2001, the fourth quarter of 2008, and the first two quarters of 2009.

The situation in Europe, which by some estimates accounts for about 15 per cent of all revenues for S&P 500 companies, has not bypassed even Apple. The iPhone-maker's revenues of $35bn missed analysts' consensus estimate by $2.15bn, mostly because of poor European sales. The challenges of a global slowdown were compounded by the strong dollar, which has appreciated by 10 per cent against the euro in five months and is within a whisker of a two-year high.

The 8 per cent rise in the dollar trade-weighted index is broadly consistent with US exports falling at an annual rate of about 5 per cent, according to Capital Economics.

That has hit US companies with large international businesses. Dow Chemical cited a $400m currency effect in their 10 per cent European sales decline. McDonald's, the largest restaurant chain by sales, also blamed lower revenues on foreign currency translation, which cost the company 7 cents per share.

Industrial bellwethers including United Technologies, UPS, Ford, Eaton and Du Pont cut their full-year earnings outlooks. Caterpillar and Honeywell also cut sales outlooks, warning of slow growth ahead, but raised their profit forecasts.

The fact that many companies maintained profits while revenues have fallen suggests that they were able to cut costs and reduce inventories. But if the top line continues to fall, cutting costs will not be a panacea.

"We want to see these companies coming with both top-line and bottom-line growth," said Paul Hickey, co-founder of Bespoke Investment Group. "You can keep growing through cost cutting and productivity growth for only so long."

Additional reporting by Vivianne Rodrigues

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