Holding Multinationals? Look Out for the Rising Dollar

The dollar has rallied sharply since mid-July. Technical trader Adam Hewison, over at INO.com, has had a buy signal since June. As I'm writing, the US Dollar Index (DX-Y.NYB) has hit a new intra-day, 52 week high. It's back at levels not seen since September 2007.

The Euro, Pound, and other currencies have of course gone lower. The Yen seems to be the only one holding up.


The recent strength in the US dollar, if it continues, may impact the future earnings of US multinationals deriving a significant portion of their revenues from abroad. Just as the falling dollar has helped earnings in the past, its continuing rise can hurt. Here is a list of some prominent companies with significant exposure abroad:

• Coca Cola (KO): Last quarter, the weak dollar contributed 9 percentage points to the company's revenue growth. 
• Du Pont (DD): 62% of 2007 sales came from abroad. Last quarter, currency exchange contributed about 5 percentage points to sales growth.
• General Electric (GE): 51% of 2007 revenue came from abroad, 54% last quarter. It's estimated that within the next couple of years this will rise to 60%. 
• McDonald's (MCD): 65% of 2007 revenues came from abroad. The firm's European sales are now higher than US sales. 
• Pepsi (PEP): 44% of 2007 revenues came from outside North America, as did 35% of the profits. 
• Pfizer (PFE): 52% of 2007 revenues came from outside the US. The weak dollar contributed 7 percentage points to the drug maker's earnings growth last quarter. 
• Philip Morris International (PM): All the firm's sales come from outside the US. Until its recent purchase of Canada's Rothmans, it didn't have sales in North America. Eleven percentage points of the cigarette maker's revenue gains were the result of the weak dollar last quarter. 
• Procter & Gamble (PG): So far this year, foreign revenues accounted for 56%. Last quarter, the falling dollar boosted sales by 6%. 

Companies that trade on US exchanges but are incorporated abroad may also be affected by the dollar's rally. For instance, a rise in the dollar against the British Pound can drive Diageo (DEO) shares lower.

Any negative effect on multinational shares is probably temporary. The dollar's rise is not expected to last. Most analysts seem to view it as a bear market rally (this can change, of course, with growth slowing in emerging countries and Europe facing the possibility of a recession).

US unemployment continues to go up (I don't buy the explanation that it's because of the benefit extension--the rate doesn't include people who have run out of benefits and are still looking for work), housing prices continue to fall, and the US is still spending like crazy on Iraq. Deficits continue to rise. There's even a (growing, but still small) possibility that the dollar's reign as the world reserve currency will come to an end.

I've noticed that terminally ill people often seem to get much better shortly before they die. The dollar looks that way.

If you're investing on the US exchanges in a company that has a large portion of its revenues coming from abroad, keep an eye on the US dollar.

Disclosure: At the time of writing, I own GE, PG, and PM. I'm happy that PM has recently raised its dividend by 17.39%.

Comments

[CT Programmer:]

It feels somewhat un-patriotic to bet against your own currency, but I agree that this rally is short-lived, and we're in a long, downward spiral of the dollar. You mentioned slower growth overseas, but you didn't mention the fact that many countries --- especially Asia, but also the EU --- are running high inflation rates. They can't keep doing that and a slowdown will of course help them but they'll have to raise rates a lot more to put the lid back on. We may see rate increases here as well maybe next year when things don't look so dismal, but not like you'll see overseas.

2008 Sep 12 08:13 AM

[The Dude:]

I dont think there is any evidence that the dollar is in a long downward spiral. Things are very negative in this country right now for many good reasons. We suffer from a lack of leadership and our government spends far too much money. Of course this results in excessive national debt which will result in more borrowing which will result in higher interest rates. The higher rates will help prop up the dollar. I think as Europe goes through their coming recession the Euro will be tested. In bad times are all those countries willing to stay together? The countries will come out of their recessions at different times and it will strain the Euro tremendously. As long as commodities (particularly oil) is denominated in US dollars the dollar will always rebound ahead of other currencies.

2008 Sep 12 09:21 AM

[onzilla:]

your naive assesment on simply revenue % from overseas greatly simplifies the issue. there are numerous COGS / OPEX that are also incurred overseas.. defferred revenue can also be positively impacted (although a offset appears on the balance sheet in remeasurement). Additionally, many of these companies hedge income statment risk for these shorter horizon moves. Competitive dynamics also come into play with local currency prices both rising and falling. Bottom line, you have NEVER conversed with someone who knows more about this subject than myself and i can tell you that in general - revenue will decrease as reported by US GAAP but the effects on net income are harder to determine. And in the long run (assuming mobility of capital), it makes very little difference in the economic value of the enterprise.

2008 Sep 12 10:19 AM

[elwind45:]

The national debt higher rate arguement is a natural assumption. The amount of money flowing out of commodites and the dollars returning home from overseas markets should hold rates down as investors hoard treasury debt. The only remaining tool in the feds toolbox is to lower the discount/fed funds from 2 down to around a half. The arguement is to lower rates to remove some pressure on I-bank portfolios. This will be acomplished under guise of helping the homeowners in trouble. The brokers will find it easier to throw the people out and let the government make up the difference. I believe that more central banks will force feds hand by selling dollars to defend their currencies (a la KOREA). I find this talk of the ECB lowering their rates nonsense. The ECB would never lower rates while currency is in freefall. Our rates must fall. All the treasury work would be destroyed without rate cut!

2008 Sep 13 05:33 AM

[Socialism c...:]

I'm not doubting that the dollar could fall again. I am long AUY, as I like gold against that possibility. But...remember that with global economies weakening, strength of the dollar is relative - what's more important are economic measures in real terms. As far as hurting multinationals...there... another side you've forgotten - the stronger dollar has helped bring down commodities (along with deleveraging by the hedgies and financials who need cash). Lower commodity costs will easily make up for the currency gains that the likes of KO and MCD benefitted from during the weak dollar era.

2008 Sep 16 05:18 PM

[Socialism c...:]

Disclosure: should mention, I'm also long KO and GE.

2008 Sep 16 05:18 PM

[Socialism c...:]

Lo and behold...here comes gold!! ;)


On Sep 16 05:18 PM Socialism cannot compete! wrote:

> I'm not doubting that the dollar could fall again. I am long AUY,
> as I like gold against that possibility. But...remember that with
> global economies weakening, strength of the dollar is relative -
> what's more important are economic measures in real terms. As far
> as hurting multinationals...there... another side you've forgotten
> - the stronger dollar has helped bring down commodities (along with
> deleveraging by the hedgies and financials who need cash). Lower
> commodity costs will easily make up for the currency gains that the
> likes of KO and MCD benefitted from during the weak dollar era.

2008 Sep 17 05:24 PM