Currency Effects And The Strengthening Dollar: Win Or Lose For Multinationals?

Includes: CCE, KO, MCD, PG
by: Skyler Greene

It's no secret that due to weak macro conditions in Europe and elsewhere, the US dollar has been on a tear this year.

^DXY Chart

^DXY data by YCharts

While traditional logic dictates that companies like Coca-Cola (KO), McDonald's (MCD), and Procter & Gamble (PG) are likely to weather the European storm due to relatively inelastic demand for soda, cheap burgers, and shampoo, the strengthening US dollar has had negative impacts on earnings of many major multinationals. McDonald's saw EPS drop 4% on currency effects, but excluding currency effects, EPS was up 3%. Coca-Cola projects forex will hurt operating income by up to 9%, and Coca-Cola Enterprises (CCE) saw currency translation hitting full-year EPS by 10%. Procter & Gamble also recently cut guidance on currency effects.

A look at the longer-term dollar index shows that the last decade has been unkind to the strength of the dollar, which would seem to be a positive for the dollar. But now, with the dollar looking like the "best of a bad bunch," is it possible multinationals will be negatively affected?

^DXY Chart

^DXY data by YCharts

Probably not. Using the aforementioned companies as examples of blue chips, it looks like EPS hasn't had much of a correlation with USD strength over the long term. The dollar index plummeted from '02 to '08, then largely reversed course into an uptrend. Yet EPS has grown fairly steadily.

KO Earnings Per Share TTM Chart

KO Earnings Per Share TTM data by YCharts

Conflating EPS growth with a chart of the dollar index, it becomes fairly clear that EPS growth for these three companies doesn't seem to have much of a correlation with the dollar index.

KO Earnings Per Share Growth Chart

KO Earnings Per Share Growth data by YCharts

Based on the data from the past decade, I believe that strong, well-managed blue chips are equipped to handle an environment with a strengthening dollar. First off, many U.S. companies are hedging currency in preparation for a meltdown of the Euro. Second, increasing strength of the U.S. dollar is generally correlated with periods of domestic economic strength. (For reference, here's a chart of the US Dollar Index from TradingEconomics.)

Historical Data Chart

In conclusion, currency effects may continue to weigh on multinationals' balance sheets in the short-term. Nonetheless, in the long term, I don't see the strengthening of the dollar posing any problems to American corporations.

Disclosure: I am long KO, PG.