Brazil's Economic Slowdown Hits Bottom Line for U.S Companies

October 7, 2015 05:30 AM
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There’s one thing that executives from New York to Madrid to Mexico City can agree on these days: Brazil is a serious drag.

DuPont, the 213-year-old chemical maker, added to the ranks of companies blaming the currency collapse and recession in Latin America’s largest economy for its earnings woes when it lowered this year’s profit forecast. Telefonica SA, America Movil SAB, Monsanto Co. and Tiffany & Co. have all seen damage to their bottom line this year as Brazil’s real posts the biggest decline among the world’s major currencies and the economy heads for its longest contraction since the Great Depression.

The impact Brazil is having on companies across the globe underscores the depth of its problems after the country become one of the world’s most important emerging markets for multinational businesses. After seeing its economy quadruple in dollar terms during Luiz Inacio Lula da Silva’s presidency from 2003 through 2010, the nation is now suffering from a rout in commodities prices, soaring inflation and a growing budget gap.

“It’s very hard to see how any company, regardless of the industry, will be able to just brush off what is happening there right now," said Mark Schaltuper, the head of the Americas research team at Fitch Inc.’s BMI Research. “It’s a systemic issue that’s affecting the wider economy.”

DuPont Co., which got 6.7 percent of its revenue from Brazil last year, said Monday that operating earnings this year will be $2.75 a share, down from the $3.10 it forecast previously. The average estimate of eight analysts surveyed by Bloomberg was $3.04.

“The revised outlook primarily reflects continued strengthening of the dollar versus currencies in emerging markets, particularly the Brazilian real, and a further weakening of agricultural markets, primarily in Brazil,” the company said in the statement.

Brazil’s economy will shrink 3 percent this year and 1 percent in 2016, according to the International Monetary Fund, while inflation remains double the central bank’s target. The malaise, and the 31 percent tumble in the real this year, is eroding the popularity of President Dilma Rousseff. That’s left her fending off calls for impeachment as she seeks to promote austerity measures, shore up the budget and save the country from more credit-rating reductions. Standard & Poor’s cut the country to junk last month.

Monsanto, the agricultural company that in 2011 was calling Brazil’s corn market "one of the single largest sources of new growth in the next few years," saw its earnings estimates lowered by Deutsche Bank AG last week to reflect the drop in the real. Analyst David Begleiter cut his price target for the shares to $110 from $130.

On Tuesday, armored-car provider Brink’s Co. cut its forecast for profit this year and next, citing in part “continued economic weakness in Brazil and currency headwinds.” The company got more than 10 percent of revenue from the Latin American nation last year.

Telecommunication companies are also suffering as consumers cut expenses. Barclays Plc on Tuesday lowered its recommendation on Telecom Italia SpA to the equivalent of sell from neutral, saying the outlook in Brazil is challenging. Madrid-based phone company Telefonica’s Chief Operating Officer Jose Maria Alvarez- Pallete said at the end of August that the company is coping with Brazil’s recession as it seeks to boost its share of the broadband market. Brazil accounts for more than a fifth of sales.

“The economy won’t help," Pallete told reporters.

Rival America Movil, the Mexico City-based telecommunications giant owned by billionaire Carlos Slim, is also seeing a drag. Its chief executive officer said in July that the economic slump is sapping demand from customers that pay in advance for its service, and making it harder to win new television subscribers.

For retailers, the impact can be seen from top to bottom. Tiffany, the luxury jewelry chain based in New York, can’t raise prices in Brazil fast enough to compensate for the decline in the real. Chief Executive Officer Frederic Cumenal said at a conference last month that the company was facing a “very difficult situation” amid global currency volatility.

Wal-Mart Stores Inc., the world’s largest retailer, said on its second-quarter conference call that “the overall economic environment is very challenging” and Brazilian consumers were taking a cautious approach to consumption as net sales at its unit in that country slipped 0.9 percent. It cited the “prolonged recession,” inflation at a 12-year high and soaring electricity prices for dragging down revenue.

“We have a stagflationary situation where the economy’s in deep recession and inflation is very high, eradicating consumer strength,” Schaltuper said. “ As far as consumer sector, food and drink and retail companies are concerned, I can definitely see how they are having a very difficult time.”


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