Weak dollar blows a strong profit tailwind

CHICAGO (Reuters) - The U.S. dollar is grinding steadily lower and Corporate America couldn't be happier.

The currency's slide is delivering a generous boost to sales and earnings for many U.S. companies, a trend most analysts see continuing through the year.

Those deriving the greatest benefit generate a significant portion of business beyond U.S. borders, where the weak greenback makes their goods cheaper to foreign buyers and profits generated in those markets are amplified when translated back into dollars.

"The weaker dollar is certainly helping the earnings of companies with international exposure," said Scott Wren, senior equity strategist at A.G. Edwards & Sons Inc. "The dollar decline so far has been pretty orderly - so that's fine as long as it stays orderly."

Coca-Cola Co. (KO.N) said on Tuesday that the weak dollar accounted for 3 percentage points, or nearly 16 percent, of its 19 percent revenue gain in the second quarter.

Drug and medical supplies maker Johnson & Johnson (JNJ.N) said currency rates accounted for 2.4 percentage points of its 13.2 percent sales increase for the second quarter -- more than 18 percent of the increase.

Toymaker Mattel Inc. MAT.N said currency accounted for 3 points of the 7-percent sales increase it saw in the quarter.

And diversified manufacturer Eaton Corp. (ETN.N) said currency accounted for half of the 4 percent sales increase it posted. On top of that, Eaton, which beat second-quarter earnings per share expectations by 23 cents, said 3 cents of that beat was due to currency.

At the end of the second quarter on June 30, the dollar was down 4 percent against a basket of major trading partner currencies .DXY compared with a year earlier.

The euro, for instance, recently reached a record high above $1.38 against the dollar, while the British pound has struck 26-year highs above $2. Only the Japanese yen JPY= has struggled to gain ground against the dollar.

The massive U.S. trade and budget deficits are seen as significant threats to the economy down the road, which has made some international investors wary of holding too many U.S. assets, hurting the dollar.

Also, the U.S. Federal Reserve has held benchmark interest rates unchanged since last June, while most other central banks have been raising rates. That diminishes the yield advantage that had benefited the dollar during the Fed's raising phase.

Most currency analysts predict the slide will continue through the year.

"Any company with any meaningful international exposure will show better than expected currency benefits," said J.P. Morgan analyst John Faucher, adding that PepsiCo Inc. (PEP.N), Procter & Gamble Co. (PG.N) and Colgate-Palmolive Co. (CL.N) would be three big beneficiaries.

WHERE THE GROWTH IS

International exposure is growing as companies seek out faster growing markets for their products than the United States.

"Companies with higher international exposure are likely to show better earnings growth, which will result in better performance for their stocks, Paul Hickey, co-founder of Bespoke Investment Group LLC said in a research note. "The weak dollar is the most often cited reason for this dichotomy, but often overlooked is the role of economic growth.

"U.S. economic growth has lagged and is forecast to continue lagging growth in the rest of the world."

According to Standard & Poor's, S&P 500 companies posted 44.2 percent of their sales outside the United States in 2006, up almost 37 percent form 2001. The data takes into account 238 companies with full reporting of overseas sales, said Howard Silverblatt, Senior Index Analyst at S&P.

Silverblatt said it was difficult to quantify the impact of the weaker dollar on earnings because companies use different strategies for hedging their currency exposure and also because companies may manufacture in one overseas country and sell in a different one, further muddying the picture.

For companies coping with rising costs for energy, corn, milk and other inputs, the weaker dollar merely offsets other factors that companies have little control over.

"We look at it more as a neutral effect for all of the companies," Arun Daniel, consumer discretionary sector analyst at ING Investment Management, said of the combination of the weak dollar and rising commodity costs. "Net, net, we think of it as maybe neutral to slightly positive."

Daniel also said that benefit could be seen for the rest of the year, depending on a company's strategy.

(Additional reporting by Kristina Cooke, James B. Kelleher, Jennifer Ablan and Martinne Geller)