A little over two weeks ago, we ran a list of “8 Big Companies With High E.U. Exposure” to see which companies had the most at risk due to the geographic ability of the customer base.  We have yet to see any waves of formal earnings warnings due to the decline of the Euro from that group of eight companies, but we have started to see the first waves of companies coming clean about what the currency impact and the changing dynamics of Europe will be on a negative impact for U.S. earnings.  Among these are Blue Coat Systems Inc. (NASDAQ: BCSI), McDonald’s Corp. (NYSE: MCD), Burger King Holdings Inc. (NYSE: BKC), 3M Co. (NYSE: MMM), and Suntech Power Holdings Co. Ltd. (NYSE: STP).  For whatever it is worth, Hewlett-Packard Co. (NYSE: HPQ) tried to downplay the importance of this last month.

Blue Coat Systems Inc. (NASDAQ: BCSI), in proxy appliances and related software and services for optimize and secure applications, blamed weakness in its European business and macroeconomic issues for its lower-than-expected outlook for the first quarter with earnings in the last two weeks.  The company said that it will be in a range of $0.35 to $0.40 EPS with revenue of $121 to $126 million.  Thomson Reuters had estimates of $0.40 EPS and $132.1 million in revenue at the time.  Not a huge-huge lowering, but it came in a climate when investors were still at least somewhat bullish.  When that hit in late-May, shares went from $28.84 down to $21.47 and shares are hovering right around $22.00 now.

What is interesting is that McDonald’s Corp. (NYSE: MCD) today posted strong sales with same-store gains up 3.4% in the U.S. and up 5.7% in Europe.  But then came word that McDonald’s sees a currency frag against earnings from Europe and elsewhere.   McDonald’s noted that it sees currency conversion hurting its full year net income now rather than earlier expectations for a slight benefit as it is now more than half outside of the United States.

McDonald’s came on the heels of a further disclosure yesterday from Burger King Holdings Inc. (NYSE: BKC) that it expects an unfavorable currency impact (mostly Euro) to cut 1 or 2 cents off of its quarterly earnings estimates.  If that is so, then Thomson Reuters estimates, which have already recently come down 1 cent to $0.35 EPS, could come down further.

3M Co. (NYSE: MMM) had its CFO at an investor conference say that the falling Euro could knock off about $0.05 EPS from its full-year earnings guidance previously put at $5.40 to $5.60.  But he also said that the downside could be drug down further if this decline turns out to be structural rather than mechanical.  The bulk of the impact will come in the second half of 2010 as its rolling currency hedges unwind.

Suntech Power Holdings Co. Ltd. (NYSE: STP) reported last week that is earnings were above plan and it raised shipment forecasts for 2010 by about 4%.  But its stock slid over added fears of a weakening Euro because almost 70% of its Q1-sales were in Europe.  The company valued the Euro’s decline cost it about $24.5 million.

Elsewhere there are concerns which may be “hopefully thinking” more than entrenched in reality.  At Hewlett-Packard Co. (NYSE: HPQ) after the recent earnings report, CEO Mark Hurd discounted the Euro decline concerns and a later negative impact on sales. Hurd said a strong Euro (weak dollar) is good for them, but he said the Euro impact was overplayed.  Approximately one-quarter of its business is derived in Europe.  It will be interesting to see if H-P keeps that same stance since a further erosion has taken place.

What you are starting to see is a pattern confirmation.  It is not a pattern of death, because currencies do move.  But strong and severe moves in this short of a time do often have an impact for companies.  Hedges are in place at many firms, but companies often are either unable to hedge against such severe moves or they deem it too expensive to hedge above and beyond certain target-ranges.  We sill have over three weeks until the end of the second calendar quarter, so you can expect more news from companies on their Euro exposure.

That list from mid-May with companies having large Euro exposure included the following, and an explanation of the exposure for each can be found here:

• Carnival Corp. (NYSE: CCL),
• Electronic Arts, Inc. (NASDAQ: ERTS),
• First Solar Inc. (NASDAQ: FSLR),
• Flowserve Corp. (NYSE: FLS),
• Harman International Industries Inc. (NYSE: HAR),
• International Flavors & Fragrances Inc. (NYSE: IFF),
• Millipore Corp. (NYSE: MIL),
• and Philip Morris International, Inc. (NYSE: PM).

JON C. OGG

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