As dollar rallies, multinationals' shares lag

By Kristina Cooke - Analysis

NEW YORK (Reuters) - Wall Street is betting the soaring dollar will erase the benefits that U.S. companies with big overseas operations have reaped over recent years when they sent their profits back home.

The dollar soared 5.4 percent against a basket of major currencies in August, the largest monthly gain in more than 11 years, while shares of multinational companies have lagged the broader market.

A weaker dollar boosts profits of U.S. multinational companies when their foreign revenues are converted into greenbacks.

Since the stock market's mid-July low, the 106 companies in the S&P 500 .SPX with more than 50 percent international revenue exposure have underperformed the benchmark index, according to data compiled by market research firm Bespoke Investment Group.

Shares of those companies are on average up 2.8 percent since July 15, while the S&P 500 is up 4.94 percent.

Meanwhile, the 148 companies in the S&P 500 with no overseas revenue, which include retailer Target (TGT.N) and health insurer UnitedHealth (UNH.N), are up on average 20 percent.

"It's pretty surprising seeing such a big discrepancy as the declines in the dollar lasted for so long and this rally has only been a few weeks," said Justin Walters, co-founder of Bespoke Investment Group.

"This shows a shift in sentiment. The impact on the revenues is not going to show up for a year or so down the road, but investors are already positioning themselves for that scenario."

The dollar on Thursday rose to its highest level against the euro this year after the European Central Bank cut its growth outlook for the 15-nation euro zone.

Currency conversion has been a huge boost for U.S. corporate profits over the past couple of years. Tobacco company Philip Morris International (PM.N), for example, said the weak dollar helped it post a better-than-expected quarterly profit in July.

Philip Morris in July said that the impact of the favorable currency exchange rates accounted for almost 10 percent of its operating companies' income, or $277 million out of income of $2.8 billion.

To be sure, some companies's shares may also be weakening as a global economic downturn gathers pace, which would also affect demand from overseas.

"The decline in the shares of those companies is both a function of the dollar's strength and the fact that people are dramatically cutting their estimates on overseas growth," said Steve Weeple, head of U.S. equities at Standard Life Investments in Boston.

Indeed, foreign exchange investors have bought back the greenback in recent weeks primarily on the bet that the dollar is a safer investment than currencies of other countries that are now suffering more from the global credit crunch than the United States.

Among companies that get more than 90 percent of their revenues from overseas, chip maker Nvidia (NVDA.O) is up 3.55 percent and Philip Morris International is up 1.4 percent since the July lows.