Johnson & Johnson (JNJ -1.20%) reduced its full-year sales and adjusted earnings guidance on Tuesday. IBM (IBM -0.05%) lowered its free cash flow outlook for 2022 on Monday. Citi cut its price target for Microsoft (MSFT 0.21%) this week as well.
Those might seem like totally unrelated events. However, the bad news for all three of these giant companies is due to the same underlying factor. This chart shows a big problem for Johnson & Johnson, IBM, and Microsoft.
Strength and weakness
The chart shown above highlights that the euro-to-U.S.-dollar exchange rate is at its lowest point in 10 years. This means that the U.S. dollar is exceptionally strong compared to the euro. Other charts featuring exchange rates with other currencies to the U.S. dollar show similar trends. But because the biggest markets for J&J, IBM, and Microsoft outside the U.S. are in Europe, it's the euro-to-dollar exchange that matters the most.
Why is a strong dollar bad for Johnson & Johnson, IBM, and Microsoft? These U.S.-based companies report their sales in U.S. dollars. There's no issue whatsoever when customers paid in U.S. dollars. The problem comes up with international sales paid in other currencies, such as the euro. These reported international sales are lower because of the currency conversion.
The strength of the U.S. dollar right now is due to several reasons. Inflation is at a 40-year high. Bond yields are rising. There are concerns that a recession could be on the way. Investors view the dollar as a safe haven.
Showing up in different ways
How much is the strong dollar impacting Johnson & Johnson? Quite a bit -- because nearly half of Johnson & Johnson's total revenue comes from international markets.
The company's sales rose 3% year over year in the second quarter of 2022 on a reported basis but jumped 8% on an operational basis excluding currency fluctuations. J&J's previous full-year guidance projected reported sales would be between $94.8 billion and $95.8 billion, with adjusted earnings per share (EPS) between $10.15 and $10.35. Now, the healthcare giant expects reported sales will be between $93.3 billion and $94.4 billion, with adjusted EPS of $10 to $10.10.
In an interview with CNBC, Johnson & Johnson CFO Joseph Wolk blamed the lower guidance entirely on the strong U.S. dollar. J&J even featured a slide in its Q2 investor presentation pointing out that the euro has fallen to the same level as the U.S. dollar for the first time in 20 years.
IBM makes a little over half of its total revenue outside of the U.S., with around 30% in Europe. The company's Q2 revenue increased 9% year over year on a reported basis but jumped 16% on a constant currency basis. IBM expects currency headwinds will lower full-year results by around 6%. The company cut its full-year free cash flow guidance from $10.5 billion to $10 billion, in large part because of the strong dollar.
IBM CFO Jim Kavanaugh said in the company's Q2 conference call that the rate at which the U.S. dollar has strengthened is "unprecedented." He noted that over half of the currencies that IBM hedges against have dropped by double digits compared to the U.S. dollar so far this year.
Microsoft won't report its quarterly results until next week. Citi analyst Tyler Radke likes the tech stock but has already reduced his price target to $330 from $364. Radke cited two reasons behind the cut: slowing demand for PCs and (you probably guessed it) foreign exchange headwinds. Like Johnson & Johnson and IBM, Microsoft generated around half of its total revenue outside of the U.S.
The not-so-almighty dollar
The currency headwinds that are impacting J&J, IBM, and Microsoft should only be temporary. The U.S. dollar might remain strong versus other currencies for a while, but it won't always be as strong as it is now. There are other factors that are much more important to the long-term success of these companies.