Dodging Strong Dollar’s Effects
The surging greenback is turning some U.S. multinationals black and blue, and that’s caused some problems for their stocks.
The U.S. dollar has climbed sharply in foreign-exchange trading this year, and for big multinational and export companies, that means sales and profits are coming under pressure. So far this year, the dollar has soared 13% against the German mark and 5% against the Japanese yen.
One of the problems this causes for the firms is that the income they’re getting overseas in the weakening foreign currencies is being converted back into fewer dollars compared with a year ago. The higher dollar also makes U.S. exports more expensive to foreign buyers, putting the products at a competitive disadvantage.
Just two examples: Polaroid Corp. (ticker symbol: PRD) and Union Carbide Corp. (UK). Both companies said the strong dollar will help push their third-quarter results below Wall Street’s expectations, and their stocks skidded more than 5% on the news.
To be sure, multinationals have some defenses against the rising dollar. Some execute arcane foreign-exchange transactions of their own to hedge against the currency fluctuations’ effect on their operating results.
The companies’ foreign plants also in effect get a break on their production costs, because those costs are incurred in the local currencies that are now lower relative to the dollar.
And some multinationals, such as Coca-Cola Co. (KO), have “brand-name and franchise value . . . that are unique and not easily substitutable,” which therefore keeps them growing in foreign markets and dilutes the impact of a stronger dollar, Goldman Sachs & Co. noted in a new report. That’s why some of the biggest U.S. multinationals are still being recommended by analysts, despite the dollar’s rally. Here are a few of their picks:
* General Motors Corp. (GM): The world’s largest auto maker is obviously being buffeted by currency swings, but analysts are focusing on several other developments for urging investors to buy the shares.
Foremost is GM’s plan this fall to dismember its publicly traded Hughes Electronics Corp. (GMH) unit, which will swell the auto maker’s earnings and stock price, predicted analyst Wendy Beale Needham of Donaldson Lufkin & Jenrette Securities.
Also, that transaction will set the stage for an initial public offering next year of GM’s Delphi Automotive Systems parts group, which will also “spotlight the hidden values in GM’s stock,” she said.
As a result, Needham sees GM climbing from its current $67.59 a share to $81, even though North American car sales this year are likely to be flat at about 15.2 million vehicles.
* Coca-Cola: Currency issues always loom large at the soft drink giant, which derives a whopping 80% of its profit from foreign operations. And the dollar’s latest surge surfaced as a problem at Coke more than a month ago, which is one reason why Coke’s usually high-flying stock is off 15% since July 31, to a recent $59.84 a share.
But Michael Branca, beverage analyst at Lehman Bros., recommends the stock, in good part because he thinks the dollar’s effect has already been factored into Coke’s share price. The greenback’s strength “is less meaningful than the very strong underlying prospects for Coca-Cola’s business,” he said. He said the dollar’s rise this year represents about a “$100-million currency hit” against Coke’s results but that since the company’s annual sales are about $20 billion, “that’s less than 1% of sales.”
* Motorola Inc. (MOT): The cellular phone and semiconductor concern’s stock plunged 13% earlier this month after Motorola disclosed that its third-quarter profit would be “significantly lower” than expectations. But the dollar wasn’t one of the major reasons. Motorola has manufacturing plants and other facilities in 40 countries.
The company said weakness in the global paging market, and its decision to close an operation that cloned Apple Computer Inc.’s (AAPL) Macintosh computers, were the main problems.
But the dollar’s strength “is not the one [problem] to be worried about” from an investment viewpoint, asserted Mona Eraiba, analyst at Gruntal & Co. And the troubles cited by Motorola are temporary, she said, so she’s keeping a “strong buy” on the stock, recently at $67.44 a share.
* General Electric Co. (GE): It would take an even stronger dollar to dissuade many analysts from recommending this premier conglomerate, which earned $7.3 billion after paying all its bills last year. Indeed, despite a recent dip, GE’s stock is still up a sizzling 60% for the last 12 months at a recent $70.31 a share.
The dollar “is not an insignificant problem,” but one well-managed by GE, whose far-flung empire includes jet engines, locomotives, lighting products, a huge finance company and the National Broadcasting Co., said analyst James Samuels of Smith Barney Inc.
He’s still recommending GE because foreign-currency swings are “something GE takes into account when they make their [earnings] forecasts” to the public, and “when they say they’ll have a certain level of growth, that’s what they mean.”
Nicholas Heymann of Prudential Securities also likes GE because its GE Capital unit has invested so heavily in foreign industry and capital markets, which gives GE “a natural hedge” against the dollar “that very few other industrial companies have.”
* Gillette Co. (G): Gillette’s stock, like that of Coca-Cola and some other consumer products companies, has skidded in the last six weeks on concerns of easing profit growth--the stock is down 11% since July 31. But once again, some analysts don’t blame the stronger dollar for the slide.
The shaving products king, which gets 63% of its sales from other nations, said last month that its 1997 and 1998 results would fall short of expectations, mainly because of sluggish results at its Braun appliance unit, especially in Germany and Japan.
But the company otherwise is performing nicely, and the stock’s pullback is “creating a rare opportunity to buy Gillette cheap,” according to analyst Alice Beebe Longley of Donaldson, Lufkin & Jenrette Securities. Gillette itself made her look prescient. Last Friday, the company announced plans to buy back 25 million of its shares over the next two years, which gave the stock a sharp boost, to a recent $86.75 a share.
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Times staff writer James F. Peltz can be reached at james.peltz @latimes.com
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Foreign Exposure
The chart shows industries that are the most-- and least-- dependent on foreign sales. Foreign sales as a percentage of total sales within Standard & Poor’s industry groups, and performance of those groups in the last three months:
Most Dependent
Housewares
Foreign sales (percentage): 64%
3-month price change: -5.3%
*
Gold and precious metals mining
Foreign sales (percentage): 62%
3-month price change: -2.1%
*
Office equipment
Foreign sales (percentage): 55%
3-month price change: +9.4%
*
International oil
Foreign sales (percentage): 54%
3-month price change: +7.1%
*
Least Dependent
Property and casualty insurance
Foreign sales (percentage): 11%
3-month price change: +5.9%
*
Publishing
Foreign sales (percentage): 11%
3-month price change: +10.3%
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Paper packaging
Foreign sales (percentage): 12%
3-month price change: +15.9%
*
Biotechnology
Foreign sales (percentage): 13%
3-month price change: -17.2%
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Still in Favor
Although the strong dollar is threatening the earnings and stock prices of major U.S. multinationals and exporters, some of the biggest names in that sector are still being recommended on Wall Street. Here are a few of them:
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Ticker Recent % Change Stock symbol price from July 31 General Motors GM $67.59 +10% Coca-Cola KO 59.84 15 General Electric GE 70.31 +1 Motorola MOT 67.44 16 Gillette G 86.75 13
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Source: Bloomberg News
