|
|
||
|
SB: Monday Morning Musings: U.S. Dollar Stability Implications
05:50pm EST 8-Apr-04 Smith Barney Citigroup Equity Strategy Monday Morning Musings: U.S. Dollar Stability Implications
April 8, 2004 SUMMARY * The dollar's recent resilience, especially Tobias M. Levkovich versus the euro could have some negative implications for stocks * Revenue and earnings growth could be Lori Calvasina restrained by dollar stability given contributions from abroad * Technology stocks look the most exposed as Lorraine Schmitt top-line growth is likely to be most scrutinized for revenue trends
OPINION
One of the most widely held beliefs on the Street, from our perspective, is that the dollar is likely to decline further given the differential between U.S. and European interest rates and the need to "solve" the trade deficit. Moreover, some view a modest descent in the value of the dollar as the least painful price to be paid for prior American consumption excesses (in that a weaker dollar will erode American purchasing power over time). Yet, of late, we have watched the dollar firm, partially as a result of renewed conviction that interest rates are headed higher as a result of the employment report that has restored some confidence in the sustainable U.S. economic growth argument.
Indeed, the greenback has rebounded more than 7% against the Euro in the past two months and this may have interesting ramifications beyond its impact on commodity prices (which are priced in dollars) and the Materials sector, in general. Specifically, the dollar's newfound strength if sustained, may have intriguing effects on corporate revenue trends as we look into subsequent quarters. And, while many investors have indicated a lack of willingness to pay for currency benefits, they still may penalize stocks if revenue shortfalls occur even if it is just a matter of less foreign exchange translation gains.
The broad U.S. dollar index has stabilized of late, and while the currency may still be vulnerable to setbacks, even stability in the dollar could impact sales trends. In particular, many companies have noted the currency benefit in their quarterly earnings releases when analyzing the contributions to revenue increases. Moreover, since investors likely will be focused on top-line acceleration, anything working against that trend might be viewed negatively.
Figure 3 provides a breakdown of the various sectors and industry groups in terms of their international sales contributions, which include sales from both countries where the dollar is pegged and others where it's not. Thus, one cannot simply look at the sales component and attribute the currency shifts to determine where the growth is coming from. But, it is instructive in terms of showing huge exposure for technology companies (especially semiconductors) where revenue developments are scrutinized even more closely than in other sectors.
Figure 3
Source: Factset
Keep in mind that S&P 500 current constituents corporate sales have recovered nicely, but one can probably assume that a portion, maybe as much as 200 basis points of growth, could have been the result of the weaker dollar. Thus, any strength in the dollar might cause deceleration in revenue growth and this would affect sequential sales growth numbers for growth industries where investors watch for every last data point. For instance, if the dollar were to hold constant for the next three months, the year-over-year change in the nominal broad dollar index would slide from 8.2% in 1Q04 to only 4.8% in 2Q04 and to less than 2.0% by 4Q04.
While we are less than convinced that one can easily manipulate the sales figures to derive the bottom-line impact, it is worthwhile to note that overseas' profits account for more than 15% of overall corporate profits and need to be monitored if the dollar exchange rates stop declining. With growth in Asia much stronger than in developed economies, this trend is quite critical for U.S. companies. The dollar has been providing a tailwind and it may ease back in terms of potency.
In a market that has provided very meaningful returns over the past 18 months, one has to be more wary of what can go wrong than what will go right, especially in the face of powerful corporate margins already being in place. In addition to our concerns about investor sentiment, earnings revisions potential and growing semiconductor industry capacity, the high price of oil, geopolitics and a less cooperative dollar may not provide investors with as much wiggle room in the months ahead. Thus, we think caution regarding the equity market remains appropriate.
ANALYST CERTIFICATION APPENDIX A-1
I, Tobias Levkovich, hereby certify that all of the views expressed in this research report accurately reflect my personal views about any and all of the subject issuer(s) or securities. I also certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report.
IMPORTANT DISCLOSURES
Analysts' compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc. and its affiliates ("the Firm"). Like all Firm employees, analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the Private Client Division, Institutional Equities, and Investment Banking.
|
||
|
|
||
|
I contenuti del “Arezzo Trade” sono di proprietà intellettuale degli autori. E' vietata la riproduzione, anche se
solo in parte, di queste pagine; per utilizzare online il materiale
presentato nel Arezzo Trade siete pregati di richiedere autorizzazione
a g.masetti@arezzotrade.com Ogni lettore deve considerarsi responsabile per i rischi dei propri investimenti e per l’uso che fa delle informazioni contenute in queste pagine. Lo studio qui proposto ha come unico scopo quello di fornire informazioni. Non e’ quindi un’offerta o un invito a comprare o a vendere titoli. Ogni decisione di investimento/disinvestimento è di esclusiva competenza dell'investitore che riceve i consigli e le raccomandazioni, il quale può decidere di darvi o meno esecuzione. The information contained herein, including any expression of opinion, has been obtained from, or is based upon, sources believed by us to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell, the securities or commodities, if any, referred to herein. There is risk of loss in all trading. This report is intended for use ONLY by the subscriber whose name appears on our subscription records. It may not be copied, faxed, or forwarded without written consent from "Arezzo Trade". The copyrights for this publication are held by the authors. |
||
|
|
||
|
|