Windfall for multinational US firms as dollar takes a dive
A weaker dollar enhances the value of foreign earnings of U.S. companies, while also making American exports more competitive.
Companies such as Levi Strauss (LEVI.N), opens new tab, Netflix (NFLX.O), opens new tab, Pepsi (PEP.O), opens new tab and 3M (MMM.N), opens new tab, which generate significant revenue from overseas sales, reported a boost to their April-June earnings or raised their annual forecasts due to the slump in the dollar.
The greenback has lost, opens new tab about 10% this year, due to rapidly changing U.S. trade policy and worries about growth and ballooning government debt.
Last week, PepsiCo, which relies on international business for about 40% of its total net revenue, forecast a smaller annual profit drop helped by a weaker dollar.
The dollar weakness "can be another source of upside that helps solidify the narrative of a very solid earnings season," said Angelo Kourkafas, senior global investment strategist at Edward Jones.
"However, there is a limit to how much credit investors will give to companies that demonstrate a large upside surprise to estimates just driven by currency trends."
Based on two decades of data, every 1% depreciation in the dollar historically improves S&P 500 earnings per share growth by about 0.6 percentage points, according to LSEG data. Roughly 38% of S&P 500 revenue is derived from international markets.
Information technology (.SPLRCT), opens new tab, consumer discretionary (.SPLRCD), opens new tab, health care (.SPXHC), opens new tab and industrial (.SPLRCI), opens new tab companies have the highest international exposure.
"We originally expected over $100 million of headwinds from a strengthening dollar and the reverse has happened," medical equipment maker Edward Lifesciences (EW.N), opens new tab CFO Scott Ullem said at a Jefferies conference on June 4.
Still, a forex tailwind isn't always enough to reassure investors, who are looking out for signs of real growth as skittish consumers curb spending.
Investors typically do not reward FX-driven sales beats the way they reward constant-currency beats, Goldman Sachs strategists said in a note.
"In many ways, investors should consider some of these things as transitory or one-time adjustments that are not sustainable," said Michael Arone, chief investment strategist at State Street Investment Management.
Netflix (NFLX.O), opens new tab shares declined more than 4% on Friday as some investors were disappointed by a revenue forecast raise that was driven more by a weaker dollar than strong demand.
Here's a list of some the companies that noted a currency-related impact in their latest earnings:
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