These 4 Stocks Will Benefit From A Weaker Dollar in Q1
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Recently the EUR/USD exchange rate surged to a price of $1.3575, mostly in the face of stabilizing conditions in Europe, and increasing uncertainty on fiscal policy in the US capped off by initial estimates of US GDP contracting by 0.1 percent in the 4th quarter. Actually, the exchange rate has been in an upswing since early July, just after the government reported that corporate profits decayed for the first time since 2008 when compared to the growth of GDP. A weak dollar can actually help some of our largest US multinationals with a significant presence in the old countries.
The reason a weak dollar helps US multinationals lies in how revenues, expenses, assets, and liabilities translate into greenbacks on consolidated financial statements. When the foreign currency is stronger than the domestic currency, translating financial statements from foreign currency to domestic results in higher revenue, net income, assets, liabilities, and total equity reported on the parent company's consolidated financial statements in most cases.
For example, in Q1 of 2012 the average EUR/USD exchange rate was $1.3106. This means that one could exchange €1 for $1.31, give or take a hundredth of a penny. A company translates income statement items at average rates over the accounting period while translating balance sheet items at either the exchange rate as of the reporting date or historical cost, depending on the specific translation method used.
Ford Motor Company (NYSE: F) had a ford tough Q1 in 2012, as the company earnings in Europe conked out at €5.5 billion, a decline of -13.7 percent. After factoring in a stronger dollar compared to a year earlier, the loss expanded to -17.3 percent.
Because the foreign currency is the strongest, revenues and net income translate at a greater number of greenbacks to euros, making company financials shine a little brighter. For Ford, Euro zone sales accounted for roughly 18 percent of company revenues. That’s just a wheel on the bus compared to companies like McDonald's (NYSE: MCD), Phillip Morris (NYSE: PM), and Apple (NASDAQ: AAPL), who all have more exposure to the old continent than Ford.
McDonald's has significant exposure with nearly 39 percent of total revenues coming from the euro zone in Q1 of last year. The company stated in its Q3 filing that Europe’s emphasis on everyday affordability added 1.8 percent in same stores sales growth in Q3 and 3.4 percent growth for the first nine months of 2012. Given an IMF forecast of -0.4 percent GDP growth in the Euro area in 2012, this is not a bad performance. With more people stomping out those butts in Europe, Phillip Morris has not fared as well as Mickey D's. Revenues are down nearly 9 percent compared to a year ago.
Consumers sometimes trade one habit for another, in this case butts for the ringtone jingle of a smart phone, as Apple reported revenue growth in Europe of almost 11 percent in its most recent filing. Not bad for a company whose stock recently took a 12 percent thrashing amid fears of slowing revenue growth.
Whether their revenues in Europe are growing, flat, or falling, a weak dollar will give a slight tailwind to each of these companies’ income statements if the EUR/USD exchange rate continues to rise.
GCMays has no position in any stocks mentioned. The Motley Fool recommends Apple, Ford, and McDonald's. The Motley Fool owns shares of Apple, Ford, McDonald's, and Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!