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European Executives Are Upbeat Despite Headwinds -- WSJ

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05/17/2018 | 08:48am CEST

By Nina Trentmann

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (May 17, 2018).

European companies are reporting slower earnings growth as currency headwinds and higher input costs squeeze profits. Their profit outlook is shadowed by the specter of potential tariffs, despite a robust economic forecast for the region.

As of Monday, 58% of the 363 companies in the Stoxx Europe 600 that have reported quarterly results beat analysts' earnings expectations, according to JPMorgan Chase & Co.

A year ago, 66% of all companies listed on the index exceeded forecasts. Earnings per share are up 10% year-over-year, also a smaller advance than in the first quarter of 2017 when earnings per share rose 25%, according to JPMorgan.

"Raw material costs and currency effects are the two main factors European companies are battling with," said Philippe Houchois, an analyst at Jefferies LLC. The euro has appreciated more than 15% against the U.S. dollar year-over-year. Oil and other commodity prices crept up during the quarter, increasing costs for companies across several industries.

U.S. companies also shouldered higher costs, but are expected to report strongest earnings growth since the fourth quarter of 2010, according to Thomson Reuters. The drop in the corporate tax rate to 21% contributed to the robust performance.

Bayer AG, the German chemicals company, said currency effects held back earnings by around EUR160 million ($191.5 million). A 1% appreciation of the euro against other currencies costs around EUR250 million in sales and lowers the company's earnings before interest, tax, depreciation and amortization by EUR70 million, a spokesman said.

Bayer's exposure to overseas markets is driving the company's vulnerability to swings in foreign exchange markets. More than three-fifths of Bayer's 2017 sales were made outside of Europe, with North America generating 29% at EUR10.14 billion in 2017 and Asia Pacific contributing 22% or EUR7.63 billion. Europe accounted for 39% or EUR13.38 billion of sales.

Higher prices for steel and plastics were a drag on profitability for car manufacturer BMW AG, which also suffered from fluctuations in the value of the Chinese renminbi and the Russian ruble. "The negative impact of currency and commodity prices dampened earnings," said Chief Financial Officer Nicolas Peter on May 4, according to Factset. The company didn't break down the impact of currency moves and higher raw material costs.

The challenges come after a phase of slow but steady economic recovery in the eurozone which culminated in annualized gross domestic product growth of 2.7% in 2017. But Europe's economic growth slowed to 1.7% in the first quarter of 2018, according to the European Statistics Agency. During that time, the U.S. economy expanded by 2.3%.

Still, more European executives are optimistic about their company's outlook, according to Manish Kabra, a strategist at Merrill Lynch. Mr. Kabra reviewed 411 first-quarter European company-event transcripts, including earnings, guidance, and sales calls. He counted 372 mentions of "better" and 212 of "stronger", compared with 124 mentions of "weaker" and 79 of "worse".

"The mindset is positive but slowing down," said Mr. Kabra.

A potential escalation of tensions between the U.S. and major trading partners is one of the reasons for cooling sentiment. That's leading some European companies to reassess their investment plans.

Electrolux AB, a Swedish maker of household appliances, is halting plans for a $250 million-investment in Springfield, Tenn., amid concerns over President Donald Trump's tariffs on imported steel and aluminum. These could apply to European companies if an exemption expires by June 1 without an agreement.

The company is taking a closer look "to fully understand the impact of any potential sort of trade consequences on our cost structure and what we need to do about that," Chief Executive Officer Jonas Samuelson said on April 27.

Most companies haven't priced in the costs of a potential trade war yet, said Mr. Kabra. "They haven't adjusted their forecasts. The guidance of companies should be taken with caution," he said.

Write to Nina Trentmann at [email protected]

Stocks mentioned in the article
ChangeLast1st jan.
BAYER -0.48% 92.96 Delayed Quote.-8.73%
BAYERISCHE MOTOREN WERKE 0.99% 80.8 Delayed Quote.-7.85%
ELECTROLUX 2.17% 207.1 Delayed Quote.-23.31%
JP MORGAN CHASE & COMPANY 0.77% 111.34 Delayed Quote.3.33%
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Financials ($)
Sales 2018 111 B
EBIT 2018 45 967 M
Net income 2018 31 139 M
Debt 2018 -
Yield 2018 2,41%
P/E ratio 2018 12,09
P/E ratio 2019 11,25
Capi. / Sales 2018 3,39x
Capi. / Sales 2019 3,26x
Capitalization 376 B
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JP Morgan Chase & Company Technical Analysis Chart | JPM | US46625H1005 | 4-Traders
Technical analysis trends JP MORGAN CHASE & COMPANY
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TrendsNeutralBearishBullish
Income Statement Evolution
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Mean consensus OUTPERFORM
Number of Analysts 30
Average target price 120 $
Spread / Average Target 8,2%
EPS Revisions
Managers
NameTitle
James Dimon Chairman & Chief Executive Officer
Gordon A. Smith Co-President & Co-Chief Operating Officer
Daniel E. Pinto Co-President & Co-Chief Operating Officer
Marianne Lake Chief Financial Officer & Executive Vice President
Lori A. Beer Chief Information Officer
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