Euro's Decline Curbs EBay, IBM, Delta Sales, Prompts S&P 500 Profit Misses

EBay Inc., International Business Machines Corp. and Delta Air Lines Inc. all pinned part of the blame for disappointing 2010 forecasts or second-quarter sales on the same culprit: the weakened euro.

The European currency averaged $1.27 in the quarter, the lowest in more than four years, hurting sales at companies from technology businesses to jet-engine manufacturers. So far in this earnings cycle, Standard & Poor’s 500 Index companies are trailing analysts’ profit estimates at almost twice the rate of the first quarter, Bloomberg data show.

“It’s one of these things that oftentimes companies take their eyes off of,” said Peter Sorrentino, a senior portfolio manager for Huntington Asset Advisors in Cincinnati, which manages $13.3 billion. “It’s something that they don’t typically focus on until it reaches up and bites them.”

The euro’s decline and other currency fluctuations will lower full-year revenue as much as $250 million at EBay, the San Jose, California-based company said yesterday. IBM, the Armonk, New York-based computer-services company, said its second- quarter sales were slashed by $500 million, and Atlanta-based Delta, the world’s largest carrier, posted a $25 million charge.

The euro may drop to $1.20 by the end of this quarter, the median of 46 estimates compiled by Bloomberg, making U.S. exports more costly and trimming overseas sales when euro- denominated figures are converted to dollars. The currency, which fell amid concern Europe’s sovereign-debt crisis may slow growth, may remain at $1.20 in the fourth quarter and finish next year at about $1.22, analysts project.

Sales From Europe

About 35 companies in the Standard & Poor’s 500 Index get more than 10 percent of sales from Europe, according to their disclosures, and many don’t fully hedge against adverse effects from currency exchange because it’s too expensive or they expect to benefit from fluctuations.

EBay, the e-commerce site owner that gets more revenue from outside the U.S. than any other large Internet company including Amazon.com Inc., Google Inc. and Yahoo! Inc., said the weakening European currency will shave off as much as 11 cents from 2010 earnings per share.

“Once we announce our guidance for a quarter, we hedge within the quarter,” EBay Chief Executive Officer John Donahoe said in an interview. “To the extent the dollar or exchange rates move over a year, we can’t control it and we don’t try to get into the game of guessing where they’re going.”

Negative Surprises

Three weeks after the second quarter ended, 16 percent of reporting S&P 500 members had posted lower per-share profit than analysts estimated, up from 8.6 percent in the same period after the first quarter, according to Bloomberg data. S&P companies still have reported profit growth of 61 percent.

So-called negative surprises were reported by 17 of the 110 S&P 500 members that announced second-quarter earnings through yesterday, compared with 10 of 116 companies reporting first- quarter earnings through April 21.

Gilead Sciences Inc., the world’s largest maker of AIDS drugs, said fluctuations in currency including the euro reduced pretax earnings by $19.5 million compared with the year-earlier period. The Foster City, California-based company reduced its full-year product sales forecast by $100 million, to $7.3 billion to $7.4 billion, and its adjusted second-quarter profit of 85 cents a share trailed the 87-cent estimate from analysts.

Like EBay, some companies projected larger impacts on their earnings in the second half of the year than in the past three months. EBay topped both profit and sales estimates yesterday.

‘Trend of Urgency’

Health-product manufacturer Johnson & Johnson’s full-year profit would be cut about 5 cents a share, to $4.65 to $4.75, by currency fluctuations if the euro remained at $1.29, compared with $1.35 earlier in the year, Chief Financial Officer Dominic Caruso said on a July 20 conference call about the New Brunswick, New Jersey-based company’s earnings.

Wolfgang Koester, who leads Fireapps Inc., said calls to his currency-strategy business have increased fivefold in the past six months, as companies race to figure out how to diminish the impact of exchange-rate fluctuations.

“We used to just get foreign-exchange managers calling us,” said Koester, whose Scottsdale, Arizona-based company makes technology to manage financial risk. “Today, it’s the treasurer, the CFO or sometimes even the CEO calling us directly. There’s a trend of urgency.”

The euro’s volatility “encourages more aggressive hedging than we’ve seen in the past few years,” said Kathy Lien, director of currency research at online currency trader GFT Forex in New York.

Long-Term Outlook

Long-term hedging is too costly for EMC Corp., the world’s biggest maker of storage computers, Chief Financial Officer David Goulden said yesterday in an interview. The company typically hedges within the quarter.

EMC projects currency fluctuation will reduce revenue for the second half of the year by $225 million. That would lower sales for the full year by $150 million, compared with an April forecast that exchange rates would have no impact.

Like EBay, EMC, based in Hopkinton, Massachusetts, typically hedges within a quarter.

“We’re in the business of IT, not currency speculation,” Goulden said. “It’s very expensive, plus kind of risky as well. Who knows which way it’s going to go?”

The euro will strengthen by the end of the year after weakening further this quarter, Goldman Sachs Group Inc. said last week.

United Technologies Corp. officially lowered the top of its full-year sales forecast yesterday to $54 billion, a decrease of $1 billion, because of the euro’s decline.

‘No Room for Error’

The Hartford, Connecticut-based maker of Pratt & Whitney jet engines and Otis elevators expects “about 8 cents of headwind year-over-year in the second half,” Chief Financial Officer Greg Hayes said on a conference call to discuss the company’s second-quarter earnings.

United Technologies now expects the euro to average $1.25 in the second half of 2010, down from a projection of $1.35 earlier this year and $1.48 at the start of 2010.

Higher orders in units including Carrier air conditioners and for Otis elevator equipment would help the company meet the top end of its full-year profit forecast, even if the euro averaged $1.20, Hayes said in June.

“The problem with a $1.20 euro is that it leaves us no contingency and no room for error,” Hayes said then. “Everything else has to kind of play out as we expect.”

To contact the reporters on this story: Katie Hoffmann in New York at khoffmann4@bloomberg.net; Joseph Galante in San Francisco at jgalante3@bloomberg.net.

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