There were several common themes in the first-quarter earnings reports from the big automakers. Strong truck sales in the U.S., a maybe-slowing (or maybe-maturing) market in China, some signs of recovery in Europe.
But one big factor in particular affected the bottom lines of just about all of the industry's major players, for better or worse: the strength of the U.S. dollar versus other major currencies.
Detroit had fewer dollars to count at the end of the first quarter
This chart shows what's going on. As you can see, over the last year, the U.S. dollar has become worth quite a bit more when converted into euros or Japanese yen.
For the big automakers, all of whom do business all over the world, those movements are significant. But their impact varies -- depending on how the automaker counts its earnings.
Ford (NYSE:F) and General Motors (NYSE:GM) report their earnings in dollars. For them, the money they earn in euros (and in other currencies that have fallen against the U.S. dollar, such as Russia's ruble) are worth less now in dollar terms than they were a year ago.
Ford's revenue dropped by about $2 billion in the first quarter from the company's year-ago result. CFO Bob Shanks told me that about 70% of that drop -- $1.4 billion, give or take -- was due to unfavorable exchange-rate movements. GM saw a slightly larger impact -- about $1.8 billion.
Like nearly all companies with significant international operations, both Ford and GM hedge against major currency swings, of course. But Shanks said that at least in Ford's case, the recent swings were sharper than some of its older hedging positions had anticipated.
That's not a surprise, and it's not a knock on Ford (or GM). It's just how these things work sometimes. But it put a damper on investors' enthusiasm for Ford and GM shares, despite generally good overall business results for both.
The story was different at many of Ford and GM's rivals, however.
The other side of the currency conversion
In contrast to the subdued first-quarter results from Ford and GM, cross-town (sort of) rival Fiat Chrysler Automobiles (NYSE:FCAU) got a windfall from exchange-rate shifts. Why? Because FCA reports its income in euros, and exchange-rate moves added 130 million euros ($145.1 million) to its results.
The weakening euro also helped boost results at German luxury stalwarts BMW (NASDAQOTH:BAMXF) and Mercedes-Benz parent Daimler (NASDAQOTH:DDAIF), while giant Volkswagen (NASDAQOTH:VWAGY) saw a roughly 200 million euro ($223.3 million) boost.
But it was the Japanese automakers that saw the really dramatic gains, thanks to the ongoing sharp drop in the yen.
Giant Toyota (NYSE:TM) reported fantastic results for the quarter ended March 31. Toyota's operating profit of 635.7 billion yen ($5.31 billion) blew away the $2.1 billion reported by GM -- even though GM sold almost as many vehicles as Toyota did during the quarter.
What accounts for the difference? Some of it is simply operating efficiency -- Toyota's is great; GM is working to close the gap. But quite a bit of it had to do with exchange rates. Toyota said the boost from the U.S. dollar's gains against the yen added 230 billion yen ($1.91 billion) to its operating income during the quarter.
Rival Honda (NYSE:HMC) had a much tougher quarter. Honda's operating income dropped 33% to 111.9 billion yen ($933.6 million) as it contended with a huge global airbag recall and a slump in sales in Japan. But it did even better than Toyota on the currency front, reporting a 290.9 billion yen gain ($2.43 billion) from currency effects during the quarter.
Short-term vs. long term
None of these gains or losses were a huge surprise, and none had a dramatic impact on the automakers' stocks in and of themselves once they were reported. But they do have an effect on expectations: Toyota said its profits for the next year should be even higher than the eye-popping result it reported for the last 12 months. Toyota will invest some of this exchange-rate windfall in its business, it said, but it will also boost its dividend and buy back 40 million of its shares.
That has investors a little more excited about Toyota (and a little less excited about companies like Ford, probably) than they would be if exchange rates had been stable for the last year or two.
And that's the real lesson, here: The lasting impact on the automakers' stocks comes not from the short-term exchange-rate moves, but from the longer-term possibilities gained or lost by the effects of the rates on income.