With Spain's nosediving economy and Greece's potential exit from the euro, the shared currency has fallen to two-year lows against the dollar, and is now at $1.23. Despite its recent decline, however, one might naturally ask why it hasn't dropped further. When the euro was first put into circulation on Jan. 1, 2002, it was worth just $0.90, and went down as low as $0.86 in March 2002. Even when it was first traded as an accounting currency in January 1999, it was worth $1.17, less than it is today. The chart below shows the euro's value in dollars over its history.
Source: European Central Bank
Ah, mon dieu
The continental currency has fallen considerably in the past year, 13% off from $1.43 last June. Considering how low it traded when it was first introduced, at another time when the U.S. economy was slow, it seems like there's plenty of room for it to fall. The euro's strength has also held up against other major currencies. As the euro declines, companies doing business on the continent gain less from their sales, as those cash flows translate into fewer dollars. Let's take a look at three companies taking a hit on a weaker euro, and who would stand to lose more if the currency falls further.
SodaStream International (Nasdaq: SODA ) : The Israeli maker of at-home, counter-top, soda machines and consumables takes in much of its sales from Europe, where its products first gained popularity. The company changed its reporting currency to dollars from euros in its most recent quarter, reflecting its push into the U.S. market. Western Europe still makes up a majority of sales though (52% in its most recent quarter), and the company has achieved 20% market penetration in countries like Sweden (though that country is not on the euro). A majority of the soda maker's manufacturing takes place at one plant in Israel, though it has production facilities in five countries.
The value of a euro has declined from a value of 5.23 Israeli shekels last August to 4.85 currently.
Philip Morris International (NYSE: PM ) : European contributions to the international spin-off from Altria have declined in recent years as Asian markets' have risen, but the European Union still contributed 33.5% of its operating income in 2011. That figure dropped from 43.9% in 2009, but continues to rise by volume, representing $2.9 billion of profits in 2011, and $6.4 billion in revenue came from the EU in Q1 2012, more than any other region. One-fifth of Philip Morris' 55 manufacturing facilities are located in Europe, but almost none of its tobacco is sourced from the continent, coming instead from locales such as the U.S., Brazil, Indonesia, and Turkey. Germany made up the company's largest market with $8.1 billion in revenue in 2011.
Coca-Cola Enterprises (NYSE: CCE ) is an independently owned bottler of Coca-Cola products, which distributes only in Europe to a population consisting of 170 million people, half of which are on the euro. Operating income was $1 billion in 2011. The company acknowledges significant currency risk in its 10-K report as well as ongoing concerns about the stability of the euro. In 2011, operating income got an 8% boost due to favorable currency exchange rates. Expect that bump to disappear this year. The company also repatriated $450 million of its earnings last year, about 60% of its total, subjecting them to U.S. taxes and currency risk, and expects to bring home a portion of its 2012 earnings as well.
But it works both ways
Of course investors could take advantage of the opposite effect by purchasing shares of European companies with large exports such as Heineken, adidas, or BMW. If the euro continues to fall, imports will become more expensive for the monetary union, while European goods will get cheaper for the rest of the world.
As the chart above shows, currency fluctuations are hard to predict and often occur for no apparent reason. For instance, during the euro's steady rise between 2002 and 2008 when it rose as high as $1.58, the American economy actually outgrew the EU's, at an annual of rate 2.6% compared to 2%. One reason for the euro's gain could've been initial skepticism toward the shared currency, which could have driven its value down before its introduction. Of course, currency exchange rates are subject to other factors as well, including interest rates and inflation. Lower interest and inflation rates will help keep currency values higher by preserving the purchasing power of the currency and encouraging borrowing.
Like many other observers, economist Charles de Grauwe of the University of Leuven in Belgium, believes the euro is slightly overvalued, deserving a price between $1.15 and $1.20. The falling euro could help stimulate the struggling economies in the eurozone by encouraging exports and purchasing within the eurozone. Investors with exposure to the continent will want to pay close attention to the travails of Spain and Greece, as well as any other signs that could further depreciate the shared currency.
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