Tech Industry

Euro crunch not a full-blown case of the flu

While analysts say the European currency crunch doesn't compare to the Asian flu of the late 1990s, international monetary agencies intervene to bolster the feeble euro.

With a number of companies citing the sinking euro currency as a damper on their earnings, investors may begin to wonder whether tech companies will begin to see a sequel to the Asian economic flu. But analysts say the currency crunch doesn't qualify as an economic crisis--yet.

In a move to curb a potential global economic crisis, the central banks of several leading economic powers intervened this morning in the currency markets to bolster the feeble euro.

The U.S. Federal Reserve, the European Central Bank, and the central bank of Japan bought an undisclosed sum of euros. The banks gave no other details, saying only that the government monetary agencies acted because of "their shared concern about the potential implications of recent movements in the euro exchange rate for the world economy."

In the past several weeks, companies such as Oracle, Hewlett-Packard and Computer Sciences have noted that the weak euro will or has had an effect on their quarterly results. Yesterday, Intel added itself to that list.

With the euro exchange rate dropping to 85 cents from nearly a one-to-one ratio with the U.S. dollar early this year, European companies and consumers are increasingly finding American goods expensive.

U.S. companies have a strong presence in international sales, but that can cause problems when exchange rates fluctuate. For example, when the euro declines in value, that means a product made in the United States becomes comparatively expensive for Europeans to buy. And a product priced at 1,000 euros will mean less revenue when translated into dollars.

Despite the recent drag on earnings as a result of a weak euro, investors, for now, should not prepare for a remake of the Asian economic crisis, said Lehman Brothers analyst Dan Niles.

"The euro is down about 15 percent over the year. It's not nearly as bad as Asia, which was down 50 percent year over year," Niles said. "Also, Europe was never in a hyper-economic growth mode compared with Asia."

Back in mid-1997, when economic woes in Japan spread to other Asian nations and eventually spilled over to European and U.S. economies, technology companies were drawn into the fold with a number of other industries. The worst of the Asian economic crisis was felt in 1998, but by mid-1999 the crisis was over.

Niles added that Europe, as a percentage of consumption for such U.S. products as PCs, is smaller than other regions. He noted that roughly 40 percent of U.S.-made computers are sold domestically, 25 percent in Europe and about 35 percent in the rest of the world.

"As I said, I don't think the magnitude of the problem will be as great as Asia. I just think we have been hit with a double whammy with the euro and oil," he said. "If the euro keeps going down, however, all bets are off."

That sentiment, however, may not help companies such as Computer Sciences, which warned in August that the weak euro is slowing revenue growth.

HP also has been hit. For the quarter ended July 31, the company's European revenue grew 17 percent in local currency. When translated into dollars, though, that growth shrunk to a mere 8 percent. By comparison, overall growth was 17 percent, with U.S. growth at 13 percent, Latin America at 27 percent and the Asia-Pacific region at 36 percent.

Meanwhile, Oracle said it was pleased its quarterly revenues met analysts' expectations, considering the weakness in Europe.

Exchange rates are one issue, but demand is another potential problem. Merrill Lynch analyst Steve Fortuna had a note of caution in a report yesterday about Dell Computer's current quarter. Dell is likely to meet its "conservative" expectations for product demand in Europe, "although there doesn't yet appear to be any significant pick-up there in corporate demand," he wrote.

The euro valuation problem is striking more than just tech companies. This week, Gillette and Goodyear Tire & Rubber warned that the weak euro will cut into their revenues.