3 Stocks That Benefit From Cheap Dollars

To the short-sighted, the dollar’s decline over the past seven months is a panic. An index that tracks its value against those of six key currencies -- including the yen, euro and British pound -- has fallen from 89 to 75. To those with a slightly longer view, the decline is merely a return from a panic. The index jumped from 71 to 89 between March 2008 and March 2009, as financial markets deteriorated and the world hoarded U.S. Treasury bonds.

An even longer view shows the dollar is indeed in a humble state, if not quite a shattered one. The dollar index is based on a starting value of 100 and a starting point of March 1973, when the world’s major trading partners permitted their currencies to float freely against each other. (For index values prior to the euro’s introduction in 1999, predecessor currencies like the French franc, Dutch guilder and German mark are used.) Thus, the buck has been only slightly weaker and a lot stronger.

Last month I argued that the U.S. dollar now looks undervalued next to rival currencies, based on comparisons of local purchasing power, and that America is in no worse financial shape than its rich peers. If the dollar is to remain cheap for a while, though, expect U.S. firms that sell overseas to benefit, along with their stockholders.

Two caveats: First, patience is needed. Dollar-fueled sales improvements are likely to be muted or nonexistent in third-quarter results being reported now. That’s because the dollar index’s average value during July, August and September was actually higher than its value during the same period a year before. In October, which will fall in the next earnings season reported months from now, the dollar index has trended about 14% below its year-ago level. Second, to target companies that are mostly likely to benefit from a weakened dollar, be sure you’re looking at true exporters. Nike’s (NKE) overseas sales exposure means nothing if it makes little in the U.S. That most American of manufacturers, Hershey (HSY), sells mainly to a U.S. crowd. The companies below build in America and sell everywhere.

A top global maker of aircraft and one of America’s largest defense contractors, Boeing (BA) is also the nation’s largest exporter. The Chicago company buys components from overseas but assembles planes stateside, chiefly in Washington and California. Shares have lost more than 40% in two years but sales have increased during that time. The company posted a sizeable third-quarter loss on charges related to development of its next-generation 787, now more than two years behind schedule. But the 787 is still years ahead of rival Airbus’s answer, the A350, and orders for the 787 remain strong. The company expects to deliver the first 787 late next year. The dollar’s decline has only made the jumbo jet more competitive. Boeing shares trade at just 11 times early forecasts for next year’s earnings.

This column recommendedCaterpillar (CAT) shares a year ago in a look at stocks for contrarian investors. They’re up 52%, versus an 11% increase for the S&P 500 index. As a leading maker of earth-moving equipment, Caterpillar has suffered mightily from a world-wide slowdown in construction and a clearing-out of inventories by retailers. The company’s sales are expected to fall 37% this year before rebounding 10% next year. Losses from Caterpillar’s financing activities have proved smaller than feared, and the company has reduced costs and now stands poised for a profit rebound as retailers replenish inventories. Analysts expect next year’s earnings per share to climb 30% to $2.59. That level of earnings makes shares seem pricey at just over $56, or about 22 times earnings, but management says it’s shooting for $8 to $12 a share in yearly earnings by 2012. Be skeptical of that goal for now, but even a return to the $5.66 a share the company earned in 2008 would make shares look cheap.

I mentioned Harley-Davidson (HOG) here just last week in a look at companies whose earnings are expected to double next year. That sounds like a promising attribute, but I view it as a negative one, because it makes for high expectations that are easily fallen short of. But Harley is at least building from a low base. Earnings this year are seen totaling just 42 cents a share. Next year they’re forecast to jump to $1.37 a share, mostly on aggressive cost cuts. That puts shares, priced at about $26 apiece, at 19 times 2010 earnings. But last year the company earned $2.79 a share and three years ago it earned close to $4. Again, a return to either level would prove shares cheap. Harley will soon have a smaller U.S. manufacturing presence it used to, because part of its cost-cutting plans involve closing a York, Pa., plant. It’s difficult to imagine hogs being built anywhere but the U.S., though, and about 30% of sales come from elsewhere.