4 U.S. Companies With High Currency Exposure

By Kristina Zucchi, CFA | February 24, 2010 AAA

The debt problems that plague Greece may cause a more widespread financial crisis of the Euro because the country may default on loans or even go into bankruptcy. This news has sent quivers throughout the U.S. stock and bond markets and as a result has caused the U.S. dollar vs. the Euro to strengthen. While many of the companies listed in the U.S. have very little or no exposure to Greece, its problems still pose a great risk to many U.S. companies. Over 40% of revenues of S&P 500 companies are made from foreign sources. This revenue is increasingly at risk as the U.S. dollar rises.

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Weak vs. Strong Dollar - What it Really Means
U.S. based companies that have a large percent of sales overseas are greatly impacted by the move in the U.S. dollar because such companies typically experiences expenses or costs in U.S. dollars. A weak dollar makes these costs cheaper than in a strong dollar environment.

If the company is a large exporter, then it garners a large percent of its sales in foreign currencies. Against a weak dollar, this other currency is able to buy more of the goods (the goods appear cheaper). As a result, the company experiences a boost to revenues and a lower expense associated with the goods. The end result is higher profits.

A strong dollar has the opposite effect. A strong dollar makes U.S. goods more expensive to the overseas markets while costs the company incurs are higher, hurting profits. So in an environment where there is a strong dollar, U.S. companies' exports become more expensive and threaten profits. (For more, see Macroeconomic Analysis.)

Four Exporters Exposed
With 40% of the S&P 500 revenues coming from overseas, many large U.S. companies are significantly impacted by the movement of the U.S. dollar. Proctor & Gamble (NYSE:PG) is one of the world's largest consumer product companies, with products ranging from beauty to health care to household care. The company posted 2009 sales of $79 billion, 32% of which came from overseas developing markets. In 2009, the company experienced a negative impact from foreign currency. If the dollar continues to strengthen, 2010 may prove to post a surprise in earnings due to the negative currency effect.

Similarly, Coca-Cola (NYSE:KO), the world's largest manufacturer and distributor of non-alcoholic beverages, operates in over 200 countries. The company generates 75% of its sales from its international markets. (For related reading, check out How U.S. Firms Benefit When The Dollar Falls.)

In a strong dollar environment, the company's foreign sales produce lower revenues, but in a weak dollar environment, this bodes well for the company. However, KO has a hedging program in place to lessen the impact from swings in currency on overall profitability, protecting the downside of a strong U.S. dollar and dampening the effects when it is weak.

McDonald's Corporation
(NYSE:MCD) is the world's largest fast food restaurant chain, operating in 110 countries. The company's revenues come from sales of its food from company owned restaurants and fees from its franchised restaurants; 70% of the restaurants are franchised. MCD has significant foreign exposure as 60% of its sales come from overseas markets. As a result, it is very sensitive to currency fluctuations.

Pfizer (NYSE:PFE) is a leading drug company, with worldwide sales of over $43B. Approximately 55% of its sales come from foreign markets. However, unlike the previous companies mentioned, PFE's profits are disproportionately garnered in the United States because drug companies are subject to pricing programs in international markets which cap prices and profitability, unlike in the U.S. free market. Despite the reduced profit-making potential in foreign markets, they still play an integral role in PFE's ability to meet its financial projections. (For related reading, check out Protect Your Foreign Investments From Currency Risk.)

The Bottom Line
The world is becoming ever increasingly global. As a result, any country's financial problems, even one that has minimal imports or exports, has an impact on the global stage. As such, companies in the U.S. with far reaching global business models are at risk to miss profit expectations as foreign currency moves against them. Looking for companies that hedge this impact, or are diversified enough from a currency standpoint, should help investors to minimize the surprise that may be associated with negative currency moves.

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