Dollar Strength Does Not Bode Well For Boeing

| About: The Boeing (BA)

Summary

55% of Boeing's revenue comes from overseas sales. They hold a significant amount of currency risk.

Raising its prices creates a bigger dilemma that it can't hedge for—a reduction in market share.

Boeing's products are 8% more expensive than they were in July, and not because of anything they've done.

American consumers have begun to enjoy the benefits of a strong dollar, such as being just a little bit more valuable during overseas travel, and electronic gadgets and other imported goods being just a little bit cheaper.

But for companies operating not just within the United States, but within the global market as a whole, the rising dollar strength is driving down their overall revenue, putting these companies in a pinch. But from an individual perspective, you're in a good position to profit from their struggles …

Since July, the dollar has gained more than 8% in value relative to a basket of other currencies - its biggest three-month rise in four years. American companies that rely heavily on exports and overseas sales are gnashing their teeth at the rising dollar, because their goods have now become more expensive to consumers outside the U.S.

Exporters are now stuck with two ugly choices: lower their prices and lose profits, or risk losing customers to cheaper competitors.

One company facing this dilemma in a big way is The Boeing Company (NYSE: BA).

Growing Headwinds for Boeing

Boeing announced its third-quarter earnings this morning before the bell, beating estimates and raising guidance. But going forward, things may not end up being as peachy as the company portrays.

That's because 55% of Boeing's revenue comes from overseas sales. Clearly they hold a significant amount of currency risk.

As our dollar strengthens, revenues from these other countries become worth less to Boeing. But its cost structure is unlikely to change significantly during the short term. If you keep your input costs the same and receive fewer revenues, your profit margins are going to shrink - and ultimately, Boeing will end up with a smaller bottom line.

In other words, Boeing is losing profit just by the strength in the dollar.

But Boeing always has some form of hedge to help cushion from this impact. In its annual report, the company states that a 10% increase in the exchange rate would decrease gains by $244 million.

In the end, Boeing has to make a choice. The company can keep its prices the same overseas and lose money as a result of turning the weaker euro into a stronger dollar. Or the company can raise its prices to reflect the rally in the dollar.

Unfortunately, raising its prices creates an even bigger dilemma for the company that it can't hedge for - a reduction in market share.

No Hedge for This Dollar Impact

The stronger dollar is a temporary problem - an issue that the Fed will be determined to rein in as it struggles to meet interest-rate expectations at the same time - that Boeing will recover from in just a few quarters. It's the loss of market share that is the real risk for Boeing.

Relationships and price competitiveness are two of the most important aspects of growing market share in a global market. And a negative impact on price competitiveness means airliners, specifically foreign ones, are going to look to Boeing's top competitor, Airbus.

Headquartered in France, Airbus (OTCPK:EADSF) won't have a European currency problem. What's more, Airbus generates about 15% of its revenue from the U.S., where its products will now be cheaper because the current exchange rate favors imports.

And as Boeing struggles to handle a stronger dollar, Airbus will be able to take this opportunity to increase its market share and establish relationships with companies whose bids it might have lost to Boeing - both in foreign nations and the U.S.

These impacts are much more pressing than the currency exchange impact on Boeing's bottom line because they will have a longer lasting impact.

Boeing can do its best to offset the bottom line, but the fact will remain its products are 8% more expensive today than they were in July - and not because of anything Boeing has done. It's the exact same product that sold for 8% less just three months ago.

Profiting From a Strong Dollar

To foreign companies buying Boeing's jets, they cost 8% more. And for U.S. companies, Boeing's competitors will be cheaper.

This is a growing problem for Boeing - one it can't hedge its way out of.

Look for the company to struggle on the bottom line in the coming quarters, which will have a negative impact on their shares. In addition, watch and see if Airbus is able to capitalize on the price differential and steal some market share from the leading airplane manufacturer, which will only help to put even more downward pressure on Boeing's shares.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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Tagged: , Aerospace/Defense Products & Services
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