For Whom the Euro Tolls


By Beth Carney The recent French and Dutch rejections of the European Union constitution did nothing to bolster the region's currency, but they may have had the indirect effect of boosting some European companies. Knocked down in the wake of those "no" votes, the euro has fallen a total of 10% against the U.S. dollar this year -- a positive move for the Continent's exporters.

"In terms of earnings development for Corporate Europe, the weaker euro has been a good thing," says Stewart Higgins, European portfolio manager for Martin Currie Investment Management in Edinburgh, Scotland, noting that more European companies will be helped rather than hurt by the shift.

Although by historical standards the 12-nation currency remains strong against the dollar, its recent trend continues downward. On June 10, the euro dropped to a fresh nine-month low of $1.2107 against the dollar, following the release of data showing that the April U.S. trade deficit came in lower than expected, and it was trading at $1.2120 at New York's close. While most pros see a limit to the amount the euro can slide, thanks in large part to the high U.S. trade deficit, disappointing economic news in Europe is likely to continue to weigh on the euro, says Charles Dautresme, European equity strategist at Standard & Poor's Equity Research in London. "For the time being, its momentum is to stay low," he observes.

WINNERS AND LOSERS. How does a weakening euro affect European companies? In such an environment, says Davina Curling, a European fund manager at F&C Asset Management in London, "there are obvious winners and losers." Broadly, any company that exports to the U.S. gets a lift when the euro declines against the dollar. The companies that suffer include those importing goods from regions with currencies that follow dollar movements or those that have high dollar-denominated commodity costs.

BusinessWeek Online asked some experts to come up with specific examples of companies that gain or lose when the euro falls -- and culled a list of the names that stood out. The five winners are:

Porsche: The German luxury carmaker generates 35% of its sales in dollars, yet produces all its cars in Europe, says Dautresme. Unlike carmakers such as DaimlerChrysler (DCX), which sells a significant number of cars in the U.S. but also has factories here generating dollar-denominated costs, Porsche "has no natural hedge," he says. Simply put, when the euro weakens, the company's U.S. sales are worth more, and its European costs are worth less. "Porsche is a big one," Higgins says. "It's very, very sensitive to the dollar."

STMicroelectronics (STM): The Franco-Italian chipmaker "should massively benefit from the weakness of the euro," says ABN Amro analyst Didier Scemama. The semiconductor concern, which reports in dollars, books more than 80% of its revenue in U.S. dollars and accounts for 65% of its operating costs in the euro zone, he said.

In the past two years, STM has underperformed its peers, in part because the strengthening euro has squeezed margins, Scemama points out. Now with a weaker euro and signs of improvement in the semiconductor sector, its outlook has improved.

LVMH (LVMUY): LVMH Moët Hennessy Louis Vuitton's luxury goods -- including Dom Perignon champagne, Fendi handbags, and Givenchy fashion -- are well-known in the U.S. American buyers account for 31% of its sales, and the company has "no significant" production facilities in the U.S., according to Dautresme.

Although it uses currency options on goods sold between its subsidiaries, LVMH isn't completely protected against currency fluctuations, which means a weaker euro boosts euro-denominated profits and sales, says Dautresme.

Sanofi-Aventis (SNY): Since the U.S. is the world's most lucrative drug market, the European pharmaceutical industry is one of the sectors most affected by shifts in the exchange rate. "The classic beneficiaries [of a stronger dollar] are always drug companies, because they have the greatest exposure to the U.S.," says Stewart Adkin, senior pharmaceutical analyst at Lehman Brothers.

According to Lehman Brothers, the euro-zone drugmaker with the most sensitivity to currency fluctuations is the region's biggest: Sanofi-Aventis, which was formed in 2004 from the merger of the French Sanofi-Synthélabo and Franco-German Aventis. By the bank's calculations, in 2004 every 5% strengthening of the U.S. dollar would have yielded a 1.6% earnings increase for Sanofi and a 2.5% boost for Aventis.

Nokia (NOK): The Finnish mobile-phone giant has been at a disadvantage for the past few years to competitors based in countries with weaker currencies, says Karen Olney, European equity strategist with investment bank Dresdner Kleinwort Wasserstein. Even though Nokia has factories in Asia, it racks up big euro-denominated costs by having a European headquarters, and it reports in euros.

"[American] Motorola (MOT) and [South Korean] Samsung (SAMCF) have had more competitive power because they had a currency going in their favor," says Olney, adding that the euro's recent slide should help improve Nokia's margins.

The stocks that might be hurt the most are:

Ryanair (RYAAY) and Easyjet (EJETJ): European airlines have been somewhat protected from high oil prices by the strong euro, since oil is priced in dollars, says Curling. So a weaker euro means fuel is more expensive for European companies.

For low-cost carriers the move is especially important, since fuel represents a bigger proportion of their total costs than it does for flag carriers (typically state-controlled or state-aided airlines), says Dautresme. Moreover, unlike major European carriers that fly across the Atlantic and in doing so book some of their revenue in dollars, the discount players only fly within Europe, leaving them further exposed, Olney notes.

Puma (PMMAY) and Adidas (ADDYY): These sporting-goods makers have headquarters in Germany, and they sell plenty of soccer cleats and track suits in Europe. However, most of their products are made in Asia, where the currencies tend to be closely linked to the U.S. dollar and have been weaker against the euro in the past few years, says Udo Rosendahl, head of European equities at DWS Investments in Frankfurt, a mutual-fund company owned by Deutsche Bank.

"When the dollar was weak, they had an advantage," says Rosendahl. Now, however, with the euro sliding, "it's going the other way around."

Hennes & Mauritz: The recent success of the Swedish retail chain known as H&M hasn't been just a function of its trendy fashion sense. It imports more than half its goods from dollar-based regions, mostly in Asia, says Olney. It also locates the vast majority of its stores in Europe.

"Earnings growth over the last three years has been hugely supported by expanding margins on the back of a shrinking cost base," Olney adds. Now that the euro is the currency that's getting weaker, the group's margins will also shrink: "This will hit the profits if it carries on." Carney is a BusinessWeek Online correspondent based in London


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