Trader Talk

Sorting out the influence of the strong dollar on revenues

Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

I've been noting the "revenue recession" that corporate America has been facing for the last six months.

We are faced with the prospects of four consecutive quarters of negative revenue growth in 2015.

Companies cannot even beat the lowered revenue guidance for this quarter. With 20% of the S&P 500 reporting, 70% of the companies have beat earnings estimates, but only 38% have beat revenue estimates.

That is pathetic!

Why has this been happening? I've been pointing out the negative influence the strong dollar has had on corporate earnings for two quarters now.

There's no question that the strong dollar is hurting companies, particularly those that get more than half of their revenues overseas.

However, I've noticed a certain tendency to dismiss the disappointing revenue numbers as solely due to the influence of the strong dollar.

That, it seems to me, is an exaggeration.

Orders are definitely deteriorating for many companies, and that is due to the slower global economy, not a strong dollar.

The problem is, there is no easy way to sort this thread out, to say, for example, "The strong dollar is 60% of the reason companies have missed revenue expectations."

But you can get a clue by looking at who is beating revenue expectations, and who is not, by sector.

All the larger sectors get roughly 50% of their sales outside the U.S.

If the stronger dollar was the only issue, there should be a roughly even distribution of sectors beating--or missing—revenue expectations.

But that's not the case. Look at this:

Q3 Revenue beats

Healthcare 65%

Tech 63%

Industrials 23%

Materials 10%

Source: S&P Capital IQ

Healthcare and tech are clearly doing better, and industrials and materials are lagging noticeably.

Why are the results so lopsided? Because industrials and materials are exposed to the slower global industrial economy and are reporting lower sales. Tech and healthcare, while also exposed to the global economy, are in sectors with better growth prospects.

This is why we hear of so many companies carving out small gains on earnings but miss on revenues: just yesterday, we heard from DuPont, Cummins, Paccar, and Textron, all global materials/Industrial names that are exposed to China and Brazil. Their sales are slowing because of the slower economies.

So let's call it a draw. The dollar and the slower global economy are the two major reasons revenues are light, and let's leave it at that.