Weak Dollar Is ‘Welcome Change’ for McDonald’s, PPG Profits

By Thomas Black

Oct. 29 (Bloomberg) -- McDonald’s Corp., United Technologies Corp. and PPG Industries Inc. are among the companies whose earnings may get a boost in the fourth quarter from a weak dollar because of foreign operations and exports.

U.S. firms are benefiting when they convert revenue from Europe with the euro touching $1.50 this month and having climbed 16 percent from a year ago as of yesterday. United Technologies, the maker of Pratt & Whitney jet engines, adds $10 million in annual operating income for every penny the euro gains against the dollar, Chief Financial Officer Gregory Hayes said in an Oct. 20 conference call.

“A cheaper dollar is unquestionably positive for U.S. corporate earnings,” Bankim Chadha, the New York-based chief U.S. equity strategist for Deutsche Bank AG. “The share of earnings coming from the rest of the world for the S&P 500 has been increasing steadily since the 1960s.”

Companies faced what PPG CEO Charles Bunch called a currency “headwind” through the third quarter because the dollar, while declining, was still reducing earnings compared with a year earlier. The tables have now turned, Bunch said on an Oct. 15. conference call.

In addition to getting a boost from currency translations, U.S. exporters such as Peoria, Illinois-based Caterpillar Inc. are helped by the weaker dollar because their goods become cheaper for consumers in Europe and most of Asia, said Alexander Blanton, an analyst with Ingalls & Snyder LLC in New York.

‘Competitive Pricing’

Caterpillar, the world’s largest maker of bulldozers and excavators, made 61 percent of its sales outside of North America last year, according to its 2008 annual report.

“They benefit in terms of competitive pricing,” Blanton said. “When the dollar is weak people find it easier to buy their equipment versus the competition.”

Analysts predict the euro will trade at $1.50 at the end of the fourth quarter as well as at the end of the first quarter of 2010, according to the median of 49 estimates compiled by Bloomberg. The average was $1.32 in the fourth quarter last year and $1.31 in the first quarter this year.

PPG, the world’s second-biggest paint maker, made 55 percent of its 2008 revenue outside of the U.S. last year, up from 34 percent in 2002, according to company filings. Currency swings cut Pittsburgh-based PPG’s third-quarter earnings by $11 million from a year ago, or 4 cents a share, Bunch said.

“Using today’s rates, currency would turn into a tailwind in the fourth quarter,” said Bunch.

‘Welcome Change’

The Dollar Index, used by InterContinental Exchange Inc. to measure the U.S. currency against the euro, pound, yen, Swedish krona, Canadian dollar and Swiss franc, has lost 6 percent this year. It rose 6 percent in 2008 as investors bought dollar assets such as Treasuries as a haven from the financial crisis.

The weaker dollar is a “welcome change” after currency changes trimmed profit by 22 cents a share in the first nine months, Peter Bensen, chief financial officer of Oak Brook, Illinois-based McDonald’s, said on an Oct. 22 conference call. McDonald’s, which gets almost two-thirds of revenue from outside the U.S., said currency translation will add about 6 cents a share to fourth-quarter earnings.

“The weaker dollar should certainly help them,” said Jack Russo, an analyst with Edward Jones & Co. in St. Louis, who recommends holding McDonald’s stock. “The reversal would be a nice cushion for them, especially since the fast-food environment is likely to be tough again next year.”

Currency Tailwind

Philip Morris International Inc., the world’s largest publicly traded tobacco company whose brands include Marlboro, expects “a more favorable currency environment” this quarter, said Chief Financial Officer Hermann Waldemer.

The New York-based company makes all of its sales outside the U.S. The currency impact, along with stronger sales, enabled it to raise its full-year earnings forecast to $3.20 to $3.25 a share, from an earlier projection of as much as $3.20.

At current exchange rates, it will be a “tailwind” next year, Waldemer said in an Oct. 22 conference call.

Foreign exchange, combined with a recovery in markets outside the U.S., will also help White Plains, New York-based Starwood Hotels and Resorts Worldwide Inc., the owner of luxury brands including the St. Regis and W hotels, according to Vasant Prabhu, its chief financial officer. Currency changes will add 200 basis points to revenue per available room in dollars this quarter and into 2010, he said on an Oct. 22 conference call.

Corporations won’t be the only ones to get a break from the weakening dollar. Tourism is getting some relief as well as foreign shoppers with stronger currencies travel to cities such as New York to seek bargains.

New York Tourism

“The weak dollar is an additional factor to why people are coming to New York City at this time, but it’s just one of the factors,” said George Fertitta, head of the city’s marketing and tourism organization.

So far, the currency weakness hasn’t attracted as many bargain-seekers as in 2007, when the city took out advertisements in the U.K. that said “Shop While the Dollar Drops,” according to Fertitta.

“If we see that sustained dip in the value of the dollar, we’ll be doing that as well,” he said in a telephone interview.

The number of foreign visitors, excluding those from Canada and Mexico, rose to 25.3 million last year from 23.9 million a year earlier, according to the Washington-based U.S. Travel Association.

McDonald’s fell 38 cents to $58.64 yesterday in New York Stock Exchange composite trading and has declined 5.7 percent this year. Caterpillar, up 22 percent this year, dropped $2.26 to $54.43, and Philip Morris, up 13 percent this year, rose 5 cents to $48.96. PPG fell $1.75 to $57.25 and has gained 35 percent this year. United Technologies, based in Hartford, Connecticut, up 17 percent this year, fell $1.48 to $62.61.

U.S. Retailers

The impact of a weaker dollar on U.S. retailers may be mitigated because they have long-term purchase contracts in dollars for the merchandise they import, said Colin McGranahan, a retail analyst with Sanford C. Bernstein & Co. in New York.

“A weak dollar is modestly favorable in the near term because of the overseas operations,” he said. “The longer term repercussions are mixed because of sourcing product.”

Energy and commodity companies benefit from the weakening dollar as oil, natural gas, copper and other commodity prices rise, said Chadha of Deutsche Bank. Crude oil in New York reached a one-year high of $81.37 on Oct. 21. Copper rose to a 13-month high on the same day.

Any benefit can turn negative if the currency drops to the point of driving up U.S. gasoline prices, crimping spending and stalling a consumer recovery, Chadha said.

Higher energy and commodity costs can also offset the gains on currency changes, said Hayes of United Technologies, which got more than 60 percent of its 2008 revenue outside the U.S.

“The dollar weakness, although it’s good on the translation side, it doesn’t necessarily help on the cost input side,” Hayes said. “So I would just be cautious about taking all of this good news from currency to the bank for next year.”

To contact the reporters on this story: Thomas Black in Monterrey at tblack@bloomberg.net;