Travelers vs Investors

A steady rise in the U.S. dollar over the past year is having a profound impact on consumer purchasing power and corporate earnings momentum, albeit in polar opposite directions. On a trade-weighted basis against a basket of six major global currencies, the U.S. Dollar Index (DXY) has appreciated 22 percent since last April, its fastest twelve month gain since 1985.

If youʼre contemplating a summer vacation abroad, book it. Itʼll be A LOT cheaper than your last visit. The only catch, you might not be paying for it with gains from your portfolio. The rising dollar is wreaking havoc on the earnings of U.S. multinationals.

When U.S. companies sell products and services abroad, they have to convert back into dollars for accounting purposes, and given the dollarʼs strength, they face the headwind of a much higher exchange rate. Even Google (GOOG), which offset $300M in currency appreciation through its hedging program, still suffered overall from dollar strength during the quarter. The dollarʼs appreciation was more than what Google and many other companies had anticipated. Consider three examples from the past 24 hours.

Travelers vs Investors

These three multinational U.S. companies provide ample evidence of the impact the rising dollar has exerted on corporate profitability. Sales recorded in dollars dropped significantly after adjusting for exchange rates, and in the case of Amazonʼs International segment, sales even contracted on a year over year basis.

In fairness, all three stocks are rallying this morning as the NASDAQ surpasses its March 2000 high and specific corporate developments outweigh currency impact (Amazonʼs Web Services revenue rose 49 percent and is now 10 percent of total sales, Microsoftʼs turnaround is finally bearing fruit as earnings beat estimates by 20 percent, and Google is, well just Google).

That said, we focus this morning on other companies which may not fare as well. We screened the S&P 500 companies which capture more than half their sales outside the U.S. and are reporting first quarter earnings in the next two weeks. Additionally, they are up more than the market so far this year. In theory, these stocks would be most impacted by dollar strength, and most likely to disappoint investors.

Twenty companies met our criteria: AFLAC Inc. (AFL); Apple Inc. (AAPL); Autodesk, Inc. (ADSK); BorgWarner Inc. (BWA); Delphi Automotive PLC (DLPH); The Estee Lauder Comaonies Inc. (EL); Expeditors International of Washington, Inc. (EXPD); FMC Corp. (FMC); Harmon International Industries, Inc. (HAR); International Flavors & Fragrances Inc. (IFF); Invesco Ltd. (IVZ); Microchip Technology Inc. (MCHP); Nvidia Corporation (NVDA); The Priceline Group Inc. (PCLN); Sealed Air Corporation (SEE); Skyworks Solutions Inc. (SWKS); Spectra Energy Corp. (SE); Varian Medical Systems, Inc. (VAR); Waters Corporation (WAT); Zoetis Inc. (ZTS)