Does the Strong
Dollar Matter?
Part 2
by Jim Surowiecki
(Surowiecki)
How 3M and IBM Did
Both 3M and Big Blue did take substantial hits from the effects of the strong
dollar. 3M, which beat estimates by just a cent but nonetheless saw its stock
soar in the week after it announced earnings, said that it lost five cents
a share due to currency effects. IBM, which does a major share of its business
abroad, said that 23 cents per share were lost as a result of the strong
dollar. Considering that, adjusting for a one-time charge, IBM grew hardly
at all over the previous year, that 23 cents might have made a real difference
in investors' minds.
Except, of course, for two things: IBM actually did better than analysts
and investors expected; and the cost of money is today just like the cost
of labor or the cost of processors. You can no more realistically add back
in those 23 cents per share than you could add back in the 35 cents per share
(or whatever the number would be) that IBM spent on Pentiums for its computers.
Set aside the second point for a minute, and look at the first. The striking
thing about the performance of IBM's stock in the wake of its earnings
announcement was how pleased analysts were with what seemed to be a rather
mediocre quarter. With almost no year-over-year growth and margins well under
ten percent, it is difficult to see why Big Blue's numbers justified the
run-up in the stock that has happened over the last two weeks.
Part of that run-up certainly has resulted from IBM's decision to increase
its dividend and to buy back 14% of its shares. But investors jumped on the
IBM bandwagon immediately after earnings were announced, sending the stock
up 11 points in a single day. And they did so because the company beat estimates
by an impressive nine cents. Relatively speaking, then, the quarter was a
good one. The company did better than it was supposed to do.
It did better, though, both because it had dampened analyst expectations
and because the strong dollar had people believing that IBM was going to
be hit especially hard this quarter. In that sense, the dollar played a crucial
role, not so much in its actual effect on IBM's earnings as in its imagined
effect, an effect that, once it was revealed to be relatively minor, made
the company shine in a new light.
Part 3, Why the Dollar Matters |