Strong Dollar A Double-Edged Sword

2/2/2015


Currencies matter. Just ask Swiss investors. The franc soared 17% versus the euro on Jan. 15 after the Swiss national bank removed its cap on the currency's value versus the euro. Owners of Swiss francs were suddenly richer as measured in euros or dollars, but shares of Swiss companies slumped nearly 9% on worries their competitiveness would suffer.

Closer to home, the dollar is surging, having risen roughly 19% against the euro and 16% versus the Japanese yen over the last six months. Helping drive gains is a steady and growing U.S. economy that attracts foreign investors. The dollar is benefiting from expectations that the U.S. Federal Reserve will raise interest rates this year — higher bond yields also appeal to overseas investors. In contrast, many foreign governments are trying to jump-start their economies with lower rates.

A strong greenback is indeed good news and bad news. For U.S. consumers, a strong dollar can translate to increased purchasing power, making foreign goods relatively less expensive. Similarly, U.S. firms that purchase materials overseas benefit. Many technology companies stand to profit from lower euro- and yen-denominated expenses.

But a strong dollar can put U.S. companies at a disadvantage because it makes their products more expensive versus those offered by foreign competitors, potentially crimping demand for exports. A strong dollar can reduce sales and earnings for many U.S. firms that generate revenue overseas. For example, a widget sold today for 1 euro is worth roughly $1.13 in revenue for a U.S. company. Just six months ago, that figure was $1.34.

Many multinational companies use a hedging strategy to help minimize currency risk. But accurate hedging can be difficult and expensive.

Implications

Unfavorable currency movements will be a drag on sales and earnings for many U.S. multinationals. The strong dollar claimed several notable victims in the December quarter, squeezing results for Microsoft ($41; MSFT), Pfizer ($32; PFE), and DuPont ($72; DD). Even Apple ($115; AAPL) said currencies reduced sales growth by four percentage points. However, the dollar's appreciation may not spell doom, as many companies' foreign revenues are actually collected in dollars. 

INTERNATIONAL SALES FOR SELECT BUY LIST STOCKS
Company (Price; Ticker)
Foreign
Sales
As % Of
Revenue
Foreign Exposure
Stocks with more than 80% of sales from overseas
Lam Research
($80; LRCX)
86
80% of sales from Asia, paced by Korea (25%).
Lear ($97; LEA)
81
25% of sales from Germany (14%) and China (11%).
Manpower ($64; MAN)
85
Operates in 80 countries, with France 26% of sales.
Micron Tech. ($29; MU)
84
China represents 41% of sales, up from
36% in 2012.
Nvidia ($19; NVDA)
82
Asia accounts for 68% of sales, with Europe at 7%.
Skyworks ($82; SWKS)
98
Nearly 70% of sales come from China.
Stocks with less than one-third of sales from overseas 
Cognizant Tech.
($54; CTSH)
22
Europe represents 18% of sales (U.K. 11%).
Foot Locker ($54; FL)
30
About 30% of sales are in foreign markets
United Rentals
($86; URI)
14
Serves Canada, which accounts for 14% of sales

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