RSS
By Keith Fitz-Gerald
Investment Director, Money Morning
When McDonald's Corp. ( MCD) recently reported that European sales were a juicy 17.5% so far this year, it was able to attribute the gain to the sliding greenback.
Had exchange rates remained unchanged from a year ago, Euro-zone sales would have been up a mere 8.3% year-to-date . While another 9.2 % worth of sales may not seem like much, consider that Ronald's European sales were 110.84% higher than they would have been without the weaker dollar .
That's worth noting. And McDonald's isn't the only U.S.-based global titan that's capitalizing on the foundering dollar.
Tiffany & Co. ( TIF), for instance, is logging record sales right here in its home U.S. market , boosted by tourists and buyers who are taking advantage of a weak dollar. Tiffany has reported a 9% sales increase in global stores open one year or more, largely as a result of a dollar that's falling against virtually every other major currency.
The game plan is much the same for Boeing Co. ( BA), Yum! Brands Inc. ( YUM), 3M Co . ( MMM), PepsiCo Inc. ( PEP), and other multinationals that are being pushed along by the currency-enhanced tailwind.
U.S. products are undeniably cheaper for foreign buyers, but especially for those paying in euros. And thanks to the benefits of "currency translation," companies such McDonald's that can source their products in weak dollars but be paid in strong e uros, can post profits with actual "super-size" potential. Let me explain …
Weak Dollar Creates New Opportunities for Big and Small Alike
A weaker dollar, even though we may not like it personally, also encourages critical U.S. suppliers to follow globally diversified companies around the world.
That's been the case with suppliers from several nations but most notably the Chinese companies that have become so integral to the world's manufacturing process.
Clearly , the flagging dollar is an issue for those selling into the United States exclusively.
However, for those savvy enough to do business with large-cap firms in Europe or U.S.-based multinationals with strong European subsidiaries, it's been an opportunity to offset a deteriorating U.S. economic situation and rising costs with stronger Euro-based sales.
This has helped keep these well-positioned companies to keep their e xchange rates and profits in line, while also keeping their products cheap by comparison.
In that sense, a weaker dollar creat es a unique opportunity to build longer-term relationships that would not otherwise be possible, particularly where smaller companies are squaring off against global giants overseas.
One privately held company that's doing exactly that is tiny Maryland-based Baltimore Dredge Enterprises.
Chances are that you've never heard of this company unless you're into river-and-dam maintenance, but Ellicott, a division of Baltimore Dredge Enterprises LLC, is beating out much-larger European rival s for big contracts in the Middle East to supply desilting dredges in Iraq . With the weaker dollar, the Baltimore can submit bids that are as much as 50% lower than its rivals .
Will this continue?
We think so, for as long as central bank Chairman Ben S. Bernanke and Team Fed continue to let the dollar slide. The one concern, however, is that the dollar may be nearing the end of its long decline. Indeed, we could logically and conceivably make the argument that the party will come to an end vis-à-vis any currency advantage.
But that won't happen. In fact, we think U.S.-based companies will continue to enjoy a currency advantage will continue for three reasons:
- First, the global currency markets are literally too big for the U.S. government to influence. Traders will win every time and right now they've decided the dollar isn't worth spit.
- Second, the strength of the dollar is not an economic success marker despite the widespread opinion to the contrary. Global companies doing business in a variety of currencies have obviated that notion and are proving that it is possible to book high profits no matter what the dollar is doing.
- Third, in a process that we refer to as "decoupling," the emergence of new markets and new consumers in China and Eastern Europe will create entirely new profit possibilities. That's increasingly a function of global pricing pressures as opposed to any U.S.-engineered economic hegemony. And that's really the single strongest argument yet for a globally diversified investment portfolio.
News and Related Story Links:
- Money Morning Investment Research:
Three Pathways to Global Profits Despite Our "Worthless Pieces of (Green) Paper" - Bloomberg News:
Dollar Rises Against Euro, Yen on U.S. Job, Productivity Gains
- MarketWatch.com:
Making sense of the dollar
