Weak Dollar Play

From BusinessWeek Magazine:

http://www.businessweek.com/magazine/content/07_53/b4065058264133.htm?chan=magazine+channel_investment+outlook+2008

A weak greenback can fan inflation by raising the cost of the necessities
of daily life. It also can curb your pleasures by making an overseas vacation
ridiculously expensive. But as an investor, you can even the score by buying the
stocks of U.S. exporters and multinationals. The sagging dollar makes those
companies' products cheaper to foreign buyers paying in their appreciated
currencies, and it shows up in companies' profits.
The dollar has declined
sharply in the past five years—29% against the euro, 20% against a basket of
trade-weighted currencies. Will it continue to weaken in the coming year? More
important, is the benefit from the enfeebled dollar already baked into the stock
prices of exporters and multinationals? That's anybody's guess. But investing in
the stocks of exporters and multinationals is still a smart play, given the
weakness in housing and anything connected with it in the domestic economy.
"Even if the dollar weren't falling," says Ian Shepherdson, chief U.S. economist
at High Frequency Economics, an economic research firm in Valhalla, N.Y., "I
would be looking for companies with an international focus—and that's just to
get away from the consumer slowdown."
Not all U.S. companies with a global
focus benefit from the weak dollar. Some hedge currencies to avoid the gyrations
of the foreign exchange market. Others manufacture many of their products
abroad, so their costs are in euros or sterling or renminbi.
Investors who
want to exploit the weak dollar should check out mutual funds that aim to do
just that. Fidelity Export & Multinational Fund (FEXPX)has a year-to-date return through Dec. 14 of 13.5%, vs. a
3.5% return by the Standard & Poor's 500-stock index. And those holding the
fund for the past five years have enjoyed an even better return: a 15.3% average
annually, vs. 11.6% for the S&P 500.
Victor Thay, who has managed the
Fidelity fund since October, 2005, emphasizes that his investments are not based
on currency forecasts. Instead, he takes a bottoms-up view of exporters and
multinationals, focusing on operating cash flow and reinvestment rates. Thay
seeks companies where earnings per share or free-cash flow can double over a
seven-year period of time.
Fidelity's Export & Multinational Fund is
weighted heavily toward technology stocks, followed by financials and energy. "With a lot of technology companies, nearly a majority if
not the majority of their revenues are coming from overseas," says Thay. Indeed,
one measure that stands out in the fund's portfolio is the high proportion of
company revenues coming from non-U.S. sources. Computer and printer giant
Hewlett-Packard (HPQ), one of the
fund's top holdings, earns roughly 65% of its sales outside the U.S. For
Monsanto (MON), the
agricultural and chemical giant, the figure is 43.4%.
GAINS IN HEALTH
CARE
Big-cap technology giants aren't the only companies benefiting from a
weaker dollar. NCR (NCR), a midsize technology services company
in Dayton, saw its revenues rise 12% in the third quarter. One-fourth of that
gain came from a favorable currency tailwind. NCR is a leader in automatic
teller machines. That segment of its business jumped 17% year-over-year because
of strong demand in the Asia-Pacific market as well as in Europe, the Middle
East, and Africa.
Health-care companies, too, get
a boost from the weaker dollar and strong overseas demand. International
revenues at $6.4 billion Becton Dickinson (BDX), a core holding of Fidelity Export & Multinational, came
to 52.3% in 2007. That was an increase of 11% from a year earlier, reflecting a
5% favorable impact from translating revenues in strong foreign currencies into
weaker dollars. For Allergan ), a pharmaceutical maker that does a third of its
business overseas, foreign currency added 2.7% to a 23.6% third-quarter sales
jump. Another company getting a healthy share of sales overseas is Sigma-Aldrich
(SIAL), which sells supplies to medical researchers in 165
countries, says Richard Moroney, who edits the Dow Theory Forecasts newsletter.
The impact of the falling dollar has been greatest for midsize U.S.
manufacturers, notes Moroney. Two companies he recommends for their ability to
tap into growing markets abroad are Ametek (AME) and Manitowoc (MTW). Ametek, a Paoli (Pa.) maker of electric motors and
electrical instruments, conducts 48% of its business outside the U.S. "Ametek is
benefiting from growth in the aerospace and power sectors," says Moroney.
Manitowoc, which manufactures cranes and other construction equipment, is a play
on the infrastructure boom continuing in emerging markets such as China and
India. The Manitowoc (Wis.)-based company raised its earnings forecast on Dec.
12, saying sales at its crane division are expected to rise 20% in 2008.
While the domestic car and truck market has been a drag on many U.S. auto
parts manufacturers, Tenneco (TEN) may be able to weather the slowdown better than most. Based
in Lake Forest, Ill, the $5.8 billion maker of emissions control devices makes
more than 50% of its revenues overseas. Although Tenneco shares are down about
30% from their high of 37.73 in August, due to jitters over the economy, the
stock was upgraded to a buy in November by Goldman Sachs analyst Patrick
Achambault with a price target of 36. Even U.S. apparel makers are seeing
advantages in the falling dollar: Timberland (TBL), the outdoor clothing maker, does about 40% of its business
overseas. Foreign exchange rates added 2.4% in revenues in the third quarter.
For Timberland, a company in the midst of cost-cutting and restructuring, those
extra dollars provide a layer of comfort.
Manufacturers aren't alone in
benefiting from the weak dollar. Some service companies are also finding an
advantage. New York-based advertising agency Interpublic Group (IPG) took in $1.56 billion in revenues in the past quarter, up 7%
from a year ago; a positive foreign currency translation added 3% to those
revenues. International ad sales for the third quarter and the first nine months
of 2007 accounted for 42.1% and 43.2%, respectively, of total sales. Corporate
Executive Board (CBE), which provides best-practices research to 3,700 corporate
clients, already derives 27% of its revenues internationally and plans to focus
its efforts on midsize European companies. Morningstar (MORN) analyst Brett Horn recently bumped up Corporate Executive
Board's rating to five stars, Morningstar's highest.

A falling dollar can't make a winner out of a weak company that does a lot of business overseas. It can, however, make a strong company even stronger.