Yahoo Finance Latest Wall Street excuse: So long 'harsh winter', Hello 'strong dollar'
It’s the latest excuse for missed earnings estimates; so long ‘harsh winter weather’, hello ‘stronger dollar.’
While the currency excuse seems overused these past few quarters, it may be a valid one. The ICE dollar index which measures the strength of the greenback against other currencies is up 8% just this year alone and up 22% in the last 12 months.
The largest U.S. companies, those in the S&P 500 (^GSPC), derive approximately 40% of revenues from abroad. A stronger dollar makes prices of their goods and services more expensive to customers overseas, and also means sales decline when repatriated from a country with weaker currency.
The sectors most impacted by the stronger dollar are of course those that do a great deal of business overseas and rely on global growth to succeed, mainly information technology, industrials, and materials.
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In the latest quarter, we saw more S&P 500 IT companies miss the Estimize earnings per share (EPS) consensus than any other sector. Essentially all sectors will feel the squeeze, but those that are more domestically focused such as utilities, telecommunication services, as well as certain consumer discretionary names will avoid the negative impact.
The stronger dollar impacts different companies in different ways. Take Netflix (NFLX) for example, even after reporting a huge Q1 profit miss due to the stronger dollar, investors rewarded the stock for adding more international subscribers than expected, showing that for this company, subscriber numbers trump profits.
Apple (AAPL) also reported a hit to fiscal second quarter revenues, but with iPhone sales soaring to an all-time high, proves that the right product can help to offset currency headwinds.
Investors were less willing to forgive multinationals such as 3M (MMM). After making changes to their business earlier in the year in order to hedge against the dollar, their efforts still resulted in a big profit loss and lowered guidance, the stock tanked as a result.
There are still plenty of S&P 500 names that will not see the dollar impact, mainly those that are domestically focused. Certain restaurant chains such as Chipotle (CMG) and Darden Restaurants (DRI), as well as retailers such as Target (TGT) and Home Depot (HD) will be more protected than their competitors because they mainly operate in the U.S. Another plus for Target is their position as the country’s second-largest importer, meaning they benefit from a more valuable dollar.
Domestic airlines carriers such as JetBlue (JBLU) and Southwest (LUV) have also been doing better than their international peers such as Delta (DAL) and United (UAL).
In short, neither analysts nor companies think the stronger dollar is going anywhere soon, with many expecting it to strengthen throughout 2015, but this doesn’t have to be a bad thing. Investors can find plenty of trading opportunities created by the stronger dollar, by targeting domestically focused names, major importers or those set to benefit from lower oil prices.
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