Multinationals May Go in Reverse

09/03/2008 12:00 am EST


Alexander Young

Equity Market Strategist, S&P Capital IQ

Alexander Young, Standard & Poor’s international equity strategist, says a stronger dollar and weak overseas economies may hurt big US blue chips.

Based on data from Standard & Poor’s 500 companies that break out foreign sales, 45.8% of their 2007 revenues were produced and sold internationally, up from 43.6% in 2006. These figures exclude exports and are based on the 251 S&P 500 constituents that reported full foreign sales. S&P Index Services, which operates independently of S&P Equity Research, compiled this data and believes this is currently the best approximation.

The energy and information technology sectors derived the highest percentage of their 2007 sales abroad, with tallies of 55.7% and 55.4%. Conversely, the financials sector had the lowest overseas sales total with only 31.6%.

While all eight measured sectors in the S&P 500 saw year-over-year increases in their 2007 foreign sales, the health care and materials sectors reported the largest annual increases of 22.7% and 20%.

Over the last 12 months, sales from overseas were a helpful offset for S&P 500 companies, particularly given ongoing weakness in the domestic housing and job markets, high commodity prices, and tighter lending standards. While year-over-year S&P 500 earnings declined since the third quarter of 2007, we believe the results would have been worse without overseas contributions.

Unfortunately, as the second half of 2008 progresses, we believe foreign sales drivers are beginning to fade, increasing the likelihood that S&P 500 foreign sales growth will moderate somewhat over the coming months.

First, the economic growth slowdown in developed foreign economies such as Canada, the United Kingdom, Europe, Japan, and Australia is accelerating, as tighter credit, weakening housing markets, strong commodity prices, and slowing exports combine to pressure economic activity.

This isn’t good news for S&P 500 companies that depend on foreign sales, as a large percentage of these revenues originate in developed foreign markets, despite the higher growth rates of emerging market sales.

Second, during the first half of 2008, US multinationals enjoyed the effects of positive foreign exchange. The US Dollar index traded at an average discount of 11.7% to the levels seen in the first half of 2007. We think aggressive Fed interest rate easing in the face of overseas tightening was primarily responsible.

However, the dollar rebounded since then. At its level of 76.3 (as of August 14th), the US Dollar Index is trading about 0.7% shy of its fourth-quarter 2007 average of 76.8. (It traded at around $78 Tuesday—Editor.)

Unless the dollar quickly resumes its decline, US multinationals will enjoy a much smaller positive currency translation in the fourth quarter of 2008 than they did in the first half of 2008. This will erode the value of their foreign sales, since the latter will be converted into fewer US dollars when the funds are repatriated.

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