Earnings and the Dollar: A Closer Look

If you get a chance to watch my show The Opening Bell at 9AM on Fox Business, you'll see that I have a new guest host each week in a position we call "In Our Corner". This week, Kathy Lien from DailyFX.com is in our corner. And she is one smart cookie.

On Monday, she pointed out what percentage of Johnson & Johnson earnings were due to currency conversions (i.e. the weak dollar). I asked her this morning to take a look at the companies who have big international operations or who have benefited from a weak dollar because they are exporting more goods and whose earnings have consequently been positively impacted by the U.S dollar. Here's a piece she sent me earlier:

The US Dollar's Impact on Earnings

With earning season upon us, everyone from investment banking analysts to longer term investors are scouring data on existing and new product lines for any information on this quarter's potential sales and profits. Most likely, unless they have inside information, everyone in the market is looking at the same news releases. However, there is one consideration that rarely pops into the mind of the American investor but can mean the difference between a good quarter and a bad one – the impact of Currency fluctuations on a company's bottom line. Too many times, companies that are expected to report good earnings for the quarter, disappoint due to either a currency's depreciation or appreciation during those three months as good sales are offset by adverse conversion rates. We have already seen countless examples of this and with many earnings reports still due for release, smart investors may find it advantageous to start looking at recent currency movements in addition to recent sales reports. The companies that will benefit the most are the ones that are heavily reliant on international sales.

In fact, we are already seeing the dollar's weakness boost revenue for many multinational corporations.

Click here to read the complete article.

You see? Super smart! A couple of things that I'd like to point out:

1. Martin Feldstein, whose interview is in my blog entitled "Mapping the Economic Future," told me this morning that he's tired of hearing about a "weak dollar." He said, it's a good currency and the fact that the dollar is at this level makes it more competitive and good for many American businesses.

2. While the cheaper (I won't use "weak" because Martin didn't like the sound of it, and neither do I) U.S. dollar is benefiting many companies like some of the ones mentioned in Lien's article, it still is a currency play and cannot necessarily be considered real earnings or revenue growth. One could argue the cheap U.S. dollar isn't going to rally any time soon and therefore will continue to benefit companies with big international operations.

3. On the other hand, one could argue that yesterday and today's earnings announcements from the likes of CSX, INTC, WFC, JPM, KO and others look great on the surface and give all of us confidence that the credit cycle is improving and that companies are still comfortable with the outlook but, I'm not sure I would want to bank on too many upside surprises where currency valuations account for the vast majority of a companies ability to beat estimates. The devil's advocate in me would say and should say that P/E ratios (price to earnings ratios) are cheap, and many of these names have been fully discounted for poor performance, a weak economy and a lack of significant near-term growth. Now when they surprise by beating estimates and giving a more upbeat analysis, they will be rewarded.