The Government Shutdown and a Weak Dollar Could Benefit These Companies

Markets don't like uncertainty, and right now the outlook for the U.S. dollar is extremely uncertain.

The United States government is in shutdown, and the debt ceiling needs to be raised or the country risks default. In addition, the Federal Reserve continues to print money, and many economists are uncertain as to the when this loose monetary policy will come to an end.

All of these factors mean that the U.S. dollar is no longer the safe haven that it once was. The DXY, an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies, has now fallen to a level not seen since February of this year. To see how much, just look at this chart of the DXY from MarketWatch.

A blessing in disguise
This is not bad news for all, however. Some investors and companies will actually benefit from a weaker dollar, especially those that conduct the majority of their sales internationally. For example, if we look at the chart above, we can see that the dollar was at its strongest during the second quarter of this year when the DXY was around $83 on average. Global tobacco behemoth Philip Morris International (NYSE: PM  )  suffered from this dollar strength. According to the company, the strong U.S. dollar took $0.14 off of the company's fiscal second quarter earnings per share (EPS). Excluding these unfavorable currency affects, the company would have reported second quarter year-on-year EPS growth of $0.12, or 4.6%. Including the effect of the strong dollar, however, EPS actually declined $0.02, or 0.8% compared to the previous year.

A weaker dollar should boost Philip Morris' earnings for both the third and fourth quarters, or at the very least should have less of a negative effect on the company's earnings. 

It's not only Philip Morris that is suffering; Burger King Worldwide  (NYSE: BKW  ) also conducts the majority of its sales internationally. Thanks to the strong dollar, comparable year-over-year sales at the end of the second quarter only expanded 0.6%. Excluding unfavorable currency effects, however, sales expanded 2.8% -- 366% more, a surprising statistic . As you can see, a weak dollar in the company's fiscal third and fourth quarters should add a much-needed boost to Burger King's sales.

It's not just the US dollar
You may have heard that it is not only the U.S. dollar that is getting a pounding right now, as emerging market currencies are also getting sold off. In particular, the Wisdom Tree Emerging Currency ETF  declined to its lowest point in nearly five years during August of this year.

Emerging market currency weakness has hurt breakfast cereal producer Kellogg Company (NYSE: K  ) , which reported currency impacting sales by nearly 10% in some of its markets. Just look at this excerpt from the company's second quarter results :

 
  Canada Europe Latin America Asia Pacific Consolidated 

2013 operating profit 

 $ 78

 $ 75

 $ 42

 $ 17

 $ 570

2012 operating profit

 $ 70

 $ 64

 $ 48

 $ 17

 $ 519

% change-2013 vs. 2012:

         

Internal business

12.5%

1.8%

(8.3%)

11.3%

2.1%

Acquisitions

0.2%

11.2%

7.6%

6.3%

5.6%

Dispositions

--%

--%

--%

3.4%

.1%

Integration impact

(0.1%)

6.9%

(0.2%)

(10.3%)

3.3%

Foreign currency impact

(1.2%

(1.4%

-9.1%

(9%)

(1.5%)

Total change

11.4%

18.5%

(10%)

1.7%

9.6%

Figures in $US millions.

During the second quarter, Kellogg's overall sales took a hit of 1.5% due to negative foreign exchange effects. In some regions, these effects were as high as 9.1%, but for the most part negative effects were offset by acquisitions.

Lastly, we have diversified technology company 3M (NYSE: MMM  ) . During the company's third fiscal quarter, sales were hit 1.3% due to negative currency translations . Once again, a weakening U.S. dollar should boost the company's bottom line and improve sales.

Foolish summary
All in all, a weaker U.S. dollar is not necessarily a bad thing. While uncertainty persists within the U.S. economy and the dollar weakens, profits at Burger King, Philip Morris and 3M should all benefit. Kellogg, however, is suffering as emerging market currencies deteriorate. That said, the company should also see some benefit from a weakening U.S. dollar during the fiscal third and fourth quarters.

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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 28, 2013, at 10:37 AM, JohnS wrote:

    30% of Kellogg's sales come from the international front. With recent controversy surrounding Kellogg and its international partner as well as low to non existent US growth, a weak dollar could be a welcoming change Kellogg needs at this point. http://goo.gl/t3ON8D

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