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Insight to All Things Currency and Treasury Management

On Tuesday morning, Johnson & Johnson (JNJ) reported earnings for the fiscal quarter ending in Dec. 2018. The company projected diminished sales growth in 2019 – between zero and one percent. This guidance can, in part, be attributed to the strong dollar as nearly 50 percent of the company’s sales come from outside of the United States.
 
The day before Johnson & Johnson released their earnings, The Street’s Jim Cramer came out with the earnings reports he would be watching this week. Perhaps most notably, Cramer said he would be watching Johnson & Johnson and using it as a gauge to see if the market cares about the effects the strong dollar has had on the company’s earnings. This would be an indicator of not just the public’s confidence in Johnson & Johnson in regard to how currencies have impacted their revenue but also how the public would respond to similar reports from other publicly held corporations in the pharma and medical devices industries.
 
It is important to note that in the past Cramer has not given much value to currencies impacting earnings and his analysis of Johnson & Johnson seems to have – for the first time – changed his approach as he is noting the material impacts to earnings and shareholder value that currency volatility can have.

In line with Cramer’s prediction, the market has since responded. After releasing company earnings and 2019 guidance, JNJ was trading lower by more than 2.5 percent on Tuesday before recovering some of those losses at the closing bell. This downturn does indeed

reflect a broader concern about the United States’ ongoing trade war with China and how currencies are impacting earnings.
 
During their earnings call, Johnson & Johnson reported that operationally sales increased 3.3 percent as currency had a negative impact of 2.3 percent. Meanwhile, worldwide sales reached $10.12 billion, growing 7.2 percent.
 
As many of you may know, myself and Nick Lowery, former NFL Kicker, have been partaking in the CNBC Power Lunch Stock Draft Championship. In April of 2018, we drafted our top 3 stock draft picks – particularly taking into account if and how companies manage currencies and previous impacts they have had to their business, while also extrapolating what that indicates with regards to the companies overall risk management level and expertise.
 
Since this summer, our draft picks – in particular, Amazon (AMZN) and AMD (AMD) have helped us to hold the number one spot in the competition – with our total performance up more than 25 percent as of Wednesday, Jan. 23, 2019 and ahead of the number-two seat, while the other seven teams are showing negative performances.
 
When choosing our draft picks, we opted to strategically base our choices off of the currency exposure of each company and whether or not they are known to manage their FX.
 
This same strategy can be considered not only when picking stocks, but when looking to see how other companies are performing in comparison to your company.
 
Does your organization manage FX and the associated risks? Do you have insight into your exposures? Do you feel comfortable with how currencies have impacted your earnings and are ready to report that to analysts or your board?
 

THE BOTTOM LINE

The importance of knowing your exposure and managing currency cannot be understated or underestimated. As can be seen from Johnson & Johnson’s latest earnings call, the impacts of currency can have a significant impact on your valuations/share price, market cap and the overall confidence of analysts, the investor community and the public.
 
FiREapps has been helping multinationals avoid negative currency impacts to their earnings for more than a decade. If you have questions on how you can start or improve your currency management program, contact FiREapps.