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By Matthew Coffina, CFA | 02-11-2015 02:00 PM

Slower Earnings Growth Likely in 2015

The robust earnings growth of recent years is unsustainable and will probably slow to 4% to 6% over the long run, says Morningstar's Matt Coffina.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm joined today by Matt Coffina. He is the editor of Morningstar StockInvestor newsletter. We are going to get his take on earnings so far and also his outlook for earnings for 2015.

Matt, thanks for joining me today.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: Ahead of this earnings season, we thought currency would be a big issue. We've heard a lot about it as results have come in. What's your take on the impact that currency is having on corporations right now?

Coffina: So, the U.S. dollar has been really strong against pretty much all global currencies, hitting multiyear highs against the euro, the yen, the Russian ruble, and the Brazilian real. This is certainly going to have an effect on a company's reported earnings, particularly for U.S.-based companies that derive a lot of earnings from foreign markets. In our portfolios, our consumer defensive names are Coca-Cola (KO), Philip Morris International (PM). Names like that tend to be the most exposed, but also broadly diversified multinational health-care companies, technology companies, and so on down the line are affected by this. So, the stronger the U.S. dollar is, the less foreign earnings are worth to U.S.-based investors, regardless of a company's reporting currency--and that's what we're seeing right now.

For companies that are fully exposed--companies that don't derive any revenue in the U.S. and derive all of their revenue in foreign markets--it could be a headwind of upwards of 10% to revenue and perhaps even larger on the bottom line, depending on where the costs are located. So, if a company has a lot of costs in the U.S. relative to its revenue, then it will probably also see some margin contraction as a result of the currency headwinds. So, this is definitely a significant issue and something worth watching.

Again, for us, our consumer staples names have been the worst affected, and currency headwinds have really wiped out all of the earnings growth we expected over the past couple of years and into 2015. In dollar terms, even if these companies are growing constant currency earnings by mid- or high-single-digit rates, their earnings in dollar terms have been flat at best or even declining.

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