At 8 a.m., Eastern Daylight Time, this Friday, Whitehouse Station reports its Q2 2012 financial results. After J&J reported European earnings impacted by the strong dollar about eight days ago, and then last week, Baxter reported about 3 to 4 percent weakening Euro impacts — at the sales line for Q2, I think it entirely fair to expect that Merck will see about the same. Afterall, Merck’s total revenue to EU-derived revenue splits are a rough approximation of those same ratios — at Baxter.
So — look for currencies to “eat away“, at a rate of about three to four percent of all of Merck’s EU-derived revenues for the second quarter. And that’s no small headwind.
Somewhat mitigating this downturn will be the fact that Merck holds large assets in Europe as well (so depreciation expense is expressed in a matched currency) — thus, those assets are natural hedges against the weak Euro. Equally important here, is the notion that most of the selling expenses are “local” as well: if Merck sells product it makes in Europe, and details with European-resident sales forces — then both the revenue and expenses are “matched” in local currency (i.e., the euro). That greatly dampens the impact of the strong dollar — on Merck’s reported bottom-line consolidated earnings per share.
But, at some point in the future, Merck will need to bring those EU-denominated earnings home — i.e., repatriate them — for projects here, or to pay dividends, on the NYSE-traded stock. That — hopefully — will be able to wait for more favorable exchange rates.
See you Friday.