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Summary:

Throughout the past several earnings periods, we’ve noted when companies were benefiting from the weak US dollar. Of late, the dollar has re…

imageThroughout the past several earnings periods, we’ve noted when companies were benefiting from the weak US dollar. Of late, the dollar has reversed course, firming against foreign currencies, and the effect this will have on earnings is becoming a big discussion point. A couple weeks ago, there was a report on what the changes meant to HP, one of several tech firms with significant international exposure. In a note today, Bernstein’s Jeff Lindsay specifically looks at what it all means to major internet firms.

Under the most pessimistic scenario — the dollar gaining another 10 percent by the end of 2009 — earnings could be whacked by 8 percent at a company like eBay (NSDQ: EBAY) and 13 percent at Yahoo. Not that Yahoo (NSDQ: YHOO) needs any more bad news, but he notes that despite its relative lack of international revenues (only 30 percent), it’s actually the most vulnerable to the trend, given its big asset holdings in Asia (a key component of the company’s current value): “Yahoo!’s valuation includes a large component for the value of these overseas investments of approximately $8.71/share at the end of 2Q:08. Under our Pessimistic Scenario, in which the dollar appreciates by a further 10% this contribution to value would be reduced directly by $0.87 to $7.84/share.”

Of course, this could all be a “head fake” so to speak and the dollar may resume its slide. In this scenario, conversely, Yahoo is the biggest beneficiary. Although Google (NSDQ: GOOG) now derives over 50 percent of its revenue from overseas, the company is the least vulnerable to currency movements, given its heightened level of profitability.

One interesting point made in the report is the “asymmetry” of currency movements: “Another important factor is that the exchange rate impact on operating margins is its asymmetry. For a company with 20 percent operating margins, 10 percent depreciation in the dollar would give a 182 basis point gain in reported operating margins. However, 10 percent appreciation in the dollar would cause a 222 basis point fall in reported operating margins. This phenomenon happens because more of the company’s costs are US-centric and this causes the asymmetry as the magnitudes of the overseas costs and revenues are impacted to a different extent by the dollar exchange rate.” A chart of potential impact on revenue growth after the jump.

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By Joseph Weisenthal

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  1. So, just to get this straight: On one hand, a stronger dollar may be good and on the other hand, a stronger dollar may be bad. And on one hand, the dollar may continue to strengthen and on the other hand the dollar may be just doing a head-fake and will weaken. Bottom line: I could have read this article and known that a strong dollar is good or bad or on the other hand I could have chosen not to read this article and know that a strong dollar is good or bad.

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  2. Joseph Weisenthal Monday, August 25, 2008

    Predicting the future direction of the dollar is like Tarot or palm reading… but there was definitely a sharp trend (downward) that's begun to reverse itself. Hence all of the sudden everyone's shifted their attitudes, and begun assuming the dollar will be stronger next year.

    Whether a strong dollar is good or bad isn't so much the point, rather earnings in recent quarters have gotten an exchange rate boost. It looks increasingly likely that that boost will disappear.

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  3. With the dollar's value being basically a matter of perception its a little bit like a popularity contest.

    After figuring out how it worked (the value of our currency) I was rather shocked that it works at all. Kind of like the internet.

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