Weak Dollar? No Problem

The euro’s ascent into record highs vs. the dollar last week overshadowed the release of bullish U.S. economic data showing a rise in consumer confidence and a robust housing market. Amid such optimistic indicators, will the weak dollar stall an industry turnaround this year?

By all accounts, the answer is no.

“What we’re seeing is very similar to what occurred in the first quarter—a lot of top-line growth is being driven by foreign exchange,” said Alexia Quadrani, a financial analyst with Bear Stearns. “From a reported-revenue basis, WPP or a Havas or Publicis may see a more significant impact than American companies. However, a lot of investors are looking beyond reported revenue and focusing more on organic growth.”

The effects are worst from a revenue perspective because of currency translation, while there is less impact on profits and virtually none on cash flow.

The impact on revenue is determined by a company’s reporting base. U.S. multinationals like Interpublic Group, Omnicom Group and Grey Global Group benefit by translating foreign earnings, rung up in euros or British pounds, into more dollars, swelling their bottom lines—even if those earnings are never brought back to the U.S.

“The weak dollar is actually benefiting U.S. companies,” said Bill Bird, an analyst at Smith Barney. Bird, like Quadrani, said he has built in the recent weakness of the dollar into his industry earnings estimates for the rest of the year.

Among the U.S. companies, Omnicom gets 30.9 percent of its revenue from Europe and Britain. IPG gets 29.6 percent of its revenue from Europe and the U.K. Grey said about 45 percent of its revenue is generated in Europe and Britain.

Conversely, European and U.K. holding companies that are translating weaker dollars into local currencies lose out because of their stronger euros and pounds. Starting in the fourth quarter, most industry companies reported signs of an improvement in North American operations after two years of disappointing results.

WPP Group earns 44 percent of revenue from North America, largely from the U.S. Publicis Groupe earns 47 percent from the U.S., and Havas brings in 44 percent.

Since the start of the year, the euro, currently at $1.18, is up about 13 percent on the dollar. The British pound is at a four-month high of $1.65.

There appears to be no specific factor underlying the euro’s soaring fortunes, although analysts say it is being boosted by investor demand for euro zone government bonds and the European Central Bank’s lack of an objection to the strengthening of its currency.

The weak dollar/strong euro does not affect borrowing costs, since most multinational companies have debt in U.S. dollars, euros and pounds sterling. Companies also use interest- management tools like interest-rate and currency swaps.

WPP group finance director Paul Richardson said he does not expect the weakness of the dollar to materially affect the company’s results this year, adding that he forecasts a maximum impact of 3-4 percent.

IPG did not respond to inquiries. An Omnicom rep said the company does not comment on future results. —