U.S. Multinationals Must Brace Themselves for Strengthening Dollar

After years of phenomenal growth overseas with a turbocharge from a declining dollar, U.S. multinationals will now have to brace themselves for a reversal of the currency exchange benefit they enjoyed for years.

Weakening Dollar Good for U.S. Multinationals

This mechanism was in some cases, solely responsible for whether a company grew earnings in a given quarter. When a company such as Deere (DE), Microsoft (MSFT) or Pfizer (PFE) sells a substantial amount of goods or services overseas, a weak U.S. dollar translates into MORE dollars when converted from the foreign currency into U.S. dollars which appears as a forable exchange variance, sometimes to the tune of several % of revenues or profits for a given quarter. Conversely, when the U.S. dollar rallies against foreign currencies, U.S. companies see the opposite effect.

Take Campbell Soup (CPB), which stated that a strengthening dollar would reduce sales and earnings growth rates in the 2009 fiscal year by about five percentage points each - 25 to 30 percent of its sales from outside the United States.

The list goes on; Covidien (COV) cited a decreased 2009 outlook lowering sales projections by 5% based on the strengthening greenback and Tiffany's (TIF) is cited a decrease in holiday sales by foreigners shopping IN the U.S.

What are the Implications?

Aside from the obsolescence of rappers' lyrics from 2007 and to the chagrin of this supermodel's foray into currency predictions, U.S. investors should expect an additional headwind against domestic multinationals and be suspect of companies that AREN'T citing a strengthening dollar as a possible negative factor from prior forecasts for the next few quarters.

Comments

[Asbytec:]

Well, Campbell's soup might just be all the rage globally by 2010.

A strong dollar would preserve our middle class wealth and we'd still need some John Deere machines to produce our food. With global recession, sales will taper off anyway. John Deere might just need to rely on domestic demand for a while, that is if a weak dollar doesn't destroy our middle class wealth, first.

And one could argue easily, Bush's dollar debasing policies have not staved off a dang thing. We're still in trouble and need foreign financing to back our stimulus plans. Best we have a strong dollar policy "going forward," as they say.

2008 Nov 27 09:40 AM

[Anthony Alfidi:]

Can the dollar's recent strengthening really be sustained into 2009? The U.S. government is on the verge of running multitrillion-dollar deficits for at least two years. A flood of money from Helicopter Ben's printing press to monetize it all will make dollar holdings very undesireable.

Besides, multinationals can and do protect themselves from the reduced earnings of a strong home currency by arranging transfer pricing deals with foreign subsidiaries. This is not a big problem at all.

2008 Nov 27 06:56 PM

[Prudent Man...:]

If printing $2 Trillion is going to increase the value of the dollar, I must be missing something. Of course, the rest of the world is doing the same thing so we just get worldwide inflation. That should help redistribute the wealth, only the wrong way.

With the Frat Boys who gave us WorldCom, Enron, Tyco, etc. running the show anything can happen, and it is usually bad. But, they are good for denying any responsibility and sweeping responsibility under the rug. But, probably, the next guy will be the same guy so they can run but not hide as they did in the nineties. They still have the same old statist media sanitizing their messes.

Obama will not have any problem with the dysfunction Republicans. He has to watch his own people who are sharpening their knives for their political opportunities. Like Clinton, Obama should just spend the next four years as he did the past two: running for president. He does that well if nothing else.

Of course, this is my country and I wish Obama success. Unfortunately, I spent more time defending it and didn't have his advantages of Hawaiian prep school, Columbia, Harvard Law on the dole than he has without his arrogance. Like the new rostrum - what a sociopathic ego.

2008 Nov 27 07:10 PM