Saturday, August 23, 2008

Slowing Global Economy And Stronger Dollar A Headwind For U.S. Multinational Firms

With a slowing global economy and a recent strengthening in the U.S. dollar, U.S. multinational companies could face an earnings headwind going forward.

global GDP growth by country June 2008As I noted in an earlier post, S & P 500 Company Sales Increasingly International, Standard & Poor's reported the percentage of 2007 sales for S&P 500 companies that come from foreign countries has increased since 2006 to 45.8% versus 43.6%, respectively.

A recent report from S&P's The Outlook website notes:
...the energy and information technology sectors derived the highest percentage of their 2007 sales abroad, 55.7% and 55.4% respectively...For the year 2007, the health care and materials sectors reported the largest annual year over year increases of 22.7% and 20%, respectively.

percentage growth international sales by S&P 500 sector
During the first half of 2008, U.S. multinationals enjoyed the effects of positive foreign exchange. The U.S. Dollar Index traded at an average discount of 11.7% to the levels seen in the first half of 2007...At its current level of 76.3 (as of August 14), the U.S. Dollar Index is trading about 0.7% shy of its fourth quarter 2007 average of 76.8.

Dollar Index August 22, 2008Unless the dollar quickly resumes its decline, U.S. multinationals will enjoy a much smaller positive currency translation in the fourth quarter of 2008 than they did in the first half of 2008. This will erode the value of their foreign sales, since the latter will be converted into fewer U.S. dollars when the funds are repatriated.
The one positive for many firms is the rapid decline in oil prices though. Petroleum based commodities are used in a wide array of products and companies should see less cost pressure as oil continues its descent. The dollar and oil prices seem to be negatively correlated at the moment and I expect oil prices to continue to fall.


Flagging Sales Abroad
The Outlook
By: Alec Young
August 22, 2008

World Economy Shows New Strain ($)
The Wall Street Journal
By: Justin Lahart in New York, Alistair MacDonald in London and Marcus Walker in Berlin
August 15, 2008

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