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Weak Dollar May Help Large Cap Earnings

As investors brace for a roller-coaster ride during the second-quarter earnings season, the dollar's weakness in the last three months could have played a key role for some multinational companies.

Over the first three months of 2009, heightened volatility in the markets led investors to seek refuge in the greenback's "safe-haven" appeal, thereby pushing the US dollar to its highest level since early March of 2006. However, the dollar's 5.07% gain during the first quarter of this year, as measured by the dollar index, a benchmark of the US dollar against six major currencies, was negated by a 6.64% drop last quarter.

While the greenback and yen usually rise on risk aversion, the dollar's status as a global reserve currency has come into question lately, causing significant fluctuations for the currency. As a result, many analysts expect that such volatility could have an impact on corporate earnings for those companies with significant global operations.

Multinational companies that were negatively impacted by the dollar's strength during the first quarter of 2009, could see that effect reverse during the second quarter, profiting from the dollar's decline.

However, it's important to note that not all US-based companies with global operations benefit from a weak dollar. Chevron , for example, issued an interim update on its second-quarter earnings on Thursday last week, stating that poor profits at refiners and "unfavorable currency effects" will offset gains from higher energy prices. The effect of petrodollars could clearly have an impact on revenue for some of the major oil producers.

The table on the right depicts the top Dow components that rely heavily on overseas operations, with over 40% of their revenue in 2008 coming from outside the United States. Assuming that foreign operations continue to represent a large source of income, the dollar's weakness in the last three months could be beneficial for some of these companies.

Intel , at the top of the list, reports earnings after the bell on Tuesday. In 2008, ~60% of their revenue came from Asia including 26% from Taiwan, 13% from China, 11% from Japan, and another 11% from the rest of Asia-Pacific countries. Look for clues in their announcement to see what impact FX had on their numbers and may have on other multinational heavyweights this earnings season.


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