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This Is the Single Greatest Threat to U.S. Multinationals

Not to sound like one of those cheesy horror movies that you see at midnight on TNT, but just when you thought it was safe to come out from under the covers, Greece's most dangerous effect on corporate earnings could be yet to come.

For those of you who don't care much for horror movies, you can relax because there's no blood involved -- but that doesn't mean corporate America won't be in the red. Instead of knife-wielding monsters, U.S. companies may succumb to the mighty dollar as it completes a Zoro-styled "Z" across their chest and brings them to their knees.

OK, so enough with the terrible metaphors -- let's explain why I'm concerned for American multinationals.

Loser by default?
A Greek default seems all but certain at this point. It's not a matter of how it's going to happen, just when. In an article earlier this week, I explored the possible outcomes of a Greek default and what the true costs to most corporations would be. I came to the conclusion that while financial institutions would suffer in the near term, these losses would be contained and very few firms would face any long-term problems.

Well, I also need to admit that there's one factor I failed to include in that article that could be of serious concern to U.S.-based companies that derive a significant portion of their revenue from Europe. If Greece defaults and the European Union is forced to absorb the shock of its sovereign debt, it could very easily cause questions to arise about the validity of the euro as a currency.

Over the past five weeks, the euro has fallen against the U.S. dollar from $1.45 to $1.34 where it is currently valued. It's very plausible to assume a Greek default could cause further erosion in the euro and strengthen the U.S. dollar. Sounds great, right? Not so fast.

Lost in translation
A strong euro and a weak dollar constrain consumer spending in the U.S. but make U.S.-made goods cheaper abroad. U.S multinationals are able to manufacture their products in America, sell their products in euros internationally, then reap the benefits of the currency translation when those euros are converted back to dollars. If the euro suddenly took a dive south, it could spell disaster for companies that have a strong reliance on Europe for their revenue.

For example, in its latest quarterly filing in July, McDonald's (NYSE: MCD  ) noted that 41% of its revenue is derived from Europe. In that report, McDonald's reported a $0.10 beneficial gain in income-per-share directly derived from favorable currency translations. Other multinationals that have a strong presence in Europe that could see earnings pressure are Procter & Gamble (NYSE: PG  ) , Ford (NYSE: F  ) , ExxonMobil (NYSE: XOM  ) , General Motors (NYSE: GM  ) , and General Electric (NYSE: GE  ) .

This isn't to say that analysts and even investors won't see past these currency translations as superficial, but it gives pessimists even more fuel for the fire. I wouldn't be surprised if earnings estimates begin falling rapidly for U.S. multinationals in line with a falling euro.

Foolish roundup
I'm still sticking with my original thesis that the real cost of a Greek default is negligible, but this is a side effect that could be trying to many long-term investors' portfolios. My advice: Don't chase a name. If earnings estimates fall and stocks begin to contract, play it smart and let those valuations come to you.

What's your outlook on the euro over the next year? Will it be higher, near the same levels it's at now, or decidedly lower? Take the time to cast your vote in the poll and in the comments section below explain what you might do if the euro does head lower.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Procter & Gamble, McDonald's, Ford Motor, and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that lays things out in a simple way everyone can understand.


Read/Post Comments (4) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 07, 2011, at 6:07 PM, brentlov wrote:

    While GM and Chrysler were trying to find their way back, Ford was following a plan which with their current leadership has made Ford the clear leader in r=this sector. The Volt? I'm just not a buyer at 40k.

  • Report this Comment On October 08, 2011, at 2:05 AM, stef333 wrote:

    @Brentlov

    Nissan Leaf makes the Volt look like a joke at $10K less. But the Volt can count on the millions of arithmetically challenged consumers out there, the ones incapable of comparative shopping.

  • Report this Comment On October 09, 2011, at 9:45 AM, rodessa wrote:

    I do think that a new international money, the BANCOR, the name is not important, based on the yuan, the yen, the euro, the USD ... and Gold will be created as many countries don't accept that the States can print the quantities of money to solve the deficit of their budget and of their commercial balance to buy petrol and other goods.The US deficit, more the one of the 50 states, of the municipalities, medicare, the guaranties given for Fanny MAE & Freddy MAC, the coming pensions to pay... are strongly much more higher in the USA than in Europe, and moreover, as it is written, the USA will not be able to struggle commercially against the european companies as they will be able to produce and export at lower prices.Think for instance to Boeing and Airbus (E.A.D.S.).So I do think that next year, the euro will be higher than $ 1.40 or not so far as the US commercial balance and the employment are going to deteriorate in the coming quaters.

  • Report this Comment On October 12, 2011, at 11:36 PM, MHedgeFundTrader wrote:

    Today, going short the currency of the world’s largest borrower, running the greatest trade and current account deficits in history, with a diminishing long term growth rate is a no brainer. But once it became every hedge fund trader’s free lunch, and positions became so lopsided against the buck, a reversal was inevitable. We seem to be solidly in one of those periodic corrections, which began with the big “RISK OFF” trade on April 29, and could continue for months or years.

    The euro has its own particular problems, with the cost of a generous social safety net sending EC budget deficits careening. Use this strength in the greenback to scale into core long positions in the currencies of countries that are major commodity exporters, boast rising trade and current account surpluses, and possess small consuming populations. I’m talking about the Canadian dollar (FXC), the Australian dollar (FXA), and the New Zealand dollar (BNZ), all of which will eventually hit parity with the greenback. Think of these as emerging markets where they speak English, best played through the local currencies. For a sleeper, buy the Chinese Yuan ETF (CYB) for your back book. A major revaluation by the Middle Kingdom is just a matter of time.

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