Dollar Strength Does Not Bode Well For U.S. Overseas Companies [Boeing Co, Caterpillar Inc.]

dollar etfChad Shoop: American consumers have begun to enjoy the benefits of a strong dollar, such as being just a little bit more valuable during overseas travel, and electronic gadgets and other imported goods being just a little bit cheaper.

But for companies operating not just within the United States, but within the global market as a whole, the rising dollar strength is driving down their overall revenue, putting these companies in a pinch. But from an individual perspective, you’re in a good position to profit from their struggles …

Since July, the dollar has gained more than 8% in value relative to a basket of other currencies — its biggest three-month rise in four years. American companies that rely heavily on exports and overseas sales are gnashing their teeth at the rising dollar, because their goods have now become more expensive to consumers outside the U.S.

Exporters are now stuck with two ugly choices: lower their prices and lose profits, or risk losing customers to cheaper competitors.

One company facing this dilemma in a big way is The Boeing Company (NYSE: BA).

Growing Headwinds for Boeing

Boeing announced its third-quarter earnings this morning before the bell, beating estimates and raising guidance. But going forward, things may not end up being as peachy as the company portrays.

That’s because 55% of Boeing’s revenue comes from overseas sales. Clearly they hold a significant amount of currency risk.

As our dollar strengthens, revenues from these other countries become worth less to Boeing. But its cost structure is unlikely to change significantly during the short term. If you keep your input costs the same and receive fewer revenues, your profit margins are going to shrink — and ultimately, Boeing will end up with a smaller bottom line.

In other words, Boeing is losing profit just by the strength in the dollar.

But Boeing always has some form of hedge to help cushion from this impact. In its annual report, the company states that a 10% increase in the exchange rate would decrease gains by $244 million.

In the end, Boeing has to make a choice. The company can keep its prices the same overseas and lose money as a result of turning the weaker euro into a stronger dollar. Or the company can raise its prices to reflect the rally in the dollar.

Unfortunately, raising its prices creates an even bigger dilemma for the company that it can’t hedge for — a reduction in market share.

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