DOLLAR

To get a sense of which companies will benefit from dollar weakness, we should look at the companies that were hurt by the dollar’s strength in the first quarter. One of the most high profile companies that are also very sensitive to foreign exchange fluctuations is Google . Over the past few years, they have implemented hedges to protect themselves against volatility in the U.S. dollar, but they are still vulnerable. In the second quarter for example, they reported that the strength of the dollar against the Euro and British pound had an unfavorable impact on their international revenues. Had foreign exchange rates remained constant, their revenues would have been approximately $429 million or 7.8 percent higher. Their foreign exchange hedges only recognized gains of $154.1 million. Considering that the dollar only strengthened 5.16 percent against the euro and 1.85 percent against the British pound in the first 3 months of the year, we can imagine the positive impact that a 14 percent appreciation of the British pound and close to 6 percent appreciation of the euro will do to earnings. Some analysts estimate that Google, who makes more than 50 percent of their money abroad will see a 20 cent contribution to earnings purely because of FX flows. The same idea that international revenues will be translated into more dollars will apply not only to Google but many other firms with large foreign operations such as eBay and Amazon.

Beyond the technology sector, another good example is McDonald’s who said that the dollar’s strength shaved earnings by $0.08 a share in the first quarter. To explain this further, imagine that McDonald’s sell Big Macs in the U.K. for 2 British pounds at a GBP/USD exchange rate of 1.80. For U.S. based McDonald’s, that would mean revenue of $3.60 per Big Mac. Suppose that the British pound weakens 20 percent, bringing the GBP/USD exchange rate down to 1.44. The 2 British pounds that they charge for each Big Mac now equals revenue of only $2.88 instead of $3.60. Compound this by millions of Big Macs sold abroad and you understand how a strong dollar can hurt a company like McDonald’s. The dollar’s weakness in Q2 however should lead to higher rather than lower profits. In their Q1 results, they projected that currency translation would cut second and third quarter earnings by $0.11 per share and now there is a decent chance that it will contribute rather than take away from earnings.

The list goes on and on. Burger King reported that in Q1, currency exchange fluctuations negatively impacted earnings by $0.03 a share. Guess, the clothes retailer, announced that profits dropped severely by 32 percent, leaving the decline in international revenue partially to blame on the strong dollar. Constellation Brands showed a similar result, with sales falling 15 percent. Each company partially attributed their weaker profits to the dollar’s strength.

Types of Companies that will be Impacted by Dollar Weakness

Let us delve into this idea further as not all companies will be impacted by the dollar in the same way. Here is a breakdown of the companies that will be positive and negatively impacted by dollar weakness.

Who benefits from Dollar weakness?

1. Exporters who sell a lot of goods abroad because a weaker dollar allows them to record greater profits or reduce prices

2. Companies with foreign operations because sales revenue generated in a foreign currency will be translated into more dollars.

3. Companies with accounts receivable in foreign currencies because when the payments are made, they will be worth more dollars.

Who is hurt by Dollar weakness?

1. Companies that import a lot of things such as raw materials from abroad

2. Companies with accounts payable in foreign currencies because when the payments are made, it would require more dollars

In general, the industries with the greatest foreign sales exposure are energy, technology and consumer staples. Companies that produce commodities could also benefit as the weaker dollar drives commodity prices higher.

We have only looked at how the dollar behaved against the majors and even though a 16 percent rally in the Australian dollar is significant, it is also important to point out that in the third quarter, the South African Rand rose 23 percent while the Brazilian Real rose 19 percent. For companies in Australia, South Africa and Brazil, a strong currency could pressure earnings and stifle the recovery. If you only trade currencies, stronger earnings in the U.S. could lift equities, which would boost risk appetite. If you trade equities, you can watch currency fluctuations to gain an edge in forecasting earnings but it will be important to take into consideration the company’s business structure. Next week we start off with earnings from Alcoa, a Dow component followed by the financials and IBM the following week.