Investing in exporters taps growing global demand and turns foreign exchange rates to your advantage
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 (AGN), 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.
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