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The Declining Dollar: A Balm for Battered Profits


For the past five years, the strong dollar has hurt many U.S. companies as earnings repatriated in weaker currencies served to put a crimp in profits, not to mention sales. The boom years of the late 1990s masked that to some degree. But the subsequent weak economy made the impact of the muscular American currency increasingly apparent. After all, about 25% of U.S. corporate profits come from overseas.

Happily for investors and corporate executives, the greenback has fallen steadily against major currencies since the beginning of the year. In that time, the dollar has lost 10% of its value against the euro and 9% against the yen. If that decline continues, it should mean better times ahead for bottom lines. Of course, companies that make goods overseas for sale here--such as electrical or computer components--could be hurt by a declining dollar. Those parts become more expensive. But overall, the National Association of Manufacturers (NAM) figures that corporate profits will rise 7.1% next year if the dollar falls by 15% from now to mid-2003. Without a lower dollar, profits will be up just 4.7%. The falling dollar is "a balm on the earnings of U.S. corporations," says Mark M. Zandi, chief economist at Economy.com Inc.

The turnaround will make a big difference for companies such as St. Jude Medical Inc. (STJ), a $1.35 billion manufacturer of pacemakers that does about a quarter of its business in Western Europe. Since 1997, the St. Paul (Minn.) company reckons that because of currency adjustments, its profits were about 0.33% lower, while the negative impact on sales totaled a full percentage point. In 2001, that translated to $500,000 less in profits and $16 million less in revenues. But the company expects its fortunes to brighten if the dollar keeps falling.

Currency fluctuations take a few months to show an impact, so the dollar's drop didn't help St. Jude in the second quarter. But if the dollar stays at current levels, currency translations should boost profits as well as add $14 million in sales in the second half, says Chief Financial Officer John C. Heinmiller. That translates into revenue growth of 16%, beating the company's current goal of 15%. "It has been several years since we've had this kind of tailwind," Heinmiller says. "One percentage point is certainly significant. It does have a positive impact."

U.S. companies that depend heavily on exports should benefit from the declining dollar as domestic goods become more competitive in international markets. In recent weeks, companies such as aerospace giant General Dynamics (GD), battery maker Energizer Holdings (ENR), and auto-parts supplier Delphi (DPH) have already noted the benefits of the declining dollar in explaining their numbers to investors. In June, the NAM released a survey of executives showing that 82% expect the lower dollar to boost exports in the last quarter of 2002.

A drop in the dollar doesn't come without risks. In addition to hurting importers, a precipitous decline could induce companies to raise prices in response to higher-priced imported goods, as many did in the late 1980s. But economists say that's not likely. "There's not much of an inflation threat right now," says L. Douglas Lee, president of Economics From Washington Inc., an economic consulting firm. "Competition is strong, and the global economy is quite weak."

So investors should generally view the dollar's latest drop as a good thing. As long as the decline is gradual, the greenback should continue to give U.S. corporations a nice boost. And it should happen just as both Big Business and investors are sorely in need of some positive news. By Laura Cohn in Washington, with Michael Arndt in Chicago


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