The wild ride of the Australian Dollar continues, with the latest plunge below $0.90 making headlines. Like clockwork, the recent drop has released a flurry of articles, including this one, touting stocks to benefit from a falling AUD. The following chart captures the peak and the valley of the AUD over the last two years.
The fall should not come as a surprise to those who follow the forecasts of the major equity research houses. Macquarie has lowered its forecast over the last year, settling in at US$0.89 for 2014 and US$0.87 for 2015. Merrill Lynch sees the AUD reaching US$0.88 by the end of 2014. US based investment firm Blackrock speculates the AUD could fall to US$0.80 by the close of 2014.
In theory, investors who prefer individual stocks over managed funds would look for ASX companies with substantial export operations and those that get paid in US dollars. Hence the “shopping lists” of such stocks you are now seeing and will continue to see on financial websites.
In practice, equating potential earnings improvements due to currency fluctuations with medium to long term share price increases is an oversimplification. First, it is problematic for even the most astute Certified Financial Analyst (CFA) to wade through a company’s financials to determine the true impact the falling AUD will have on profitability. Companies use a variety of hedging strategies to protect against currency volatility at a cost that is not always easy to determine.
Of more importance may be the relative factors making one currency stronger than another, keeping in mind “strength” is a measure of investor willingness to invest in one currency over another. In short, a currency is worth whatever buyers are willing to pay for it and right now investors are favoring the US dollar over the Aussie dollar and most other currencies as well.
Experts will tell you the fact one country’s currency is worth more than that of others is not a hard and fast indicator of a stronger economy. However, perhaps the most important driver of currency fluctuations is interest rates, which tell investors a different story. The AUD began its dramatic rise when interest rates in Australia were among the highest in the world, while interest rates in the US were approaching zero. The US Federal Reserve cut rates to strengthen a weakened economy. Australia’s economy was propped up by the resources boom, attracting foreign investors seeking better yields.
In essence, the situation has now reversed. Commodity prices have fallen, the resource boom is over, and the RSB (Reserve Bank of Australia) has begun cutting interest rates, and may cut further to prop up the Australian economy. In a solid example of the power of perception, the US has yet to raise interest rates, but the belief that raises are coming is boosting the US dollar.
Investing in a stock based solely on the potential benefit of a lower AUD is a fool’s game. One cannot overlook the fact the decline of the AUD is in part due to the weakening commodity prices, the perception of dwindling Chinese demand, and a general concern about a downturn in our economy.
In essence, if the AUD continues to fall, the share market is more than likely to follow suit. As an example, consider two well known Australian electronics retailers – JB Hi Fi (JBH) and Harvey Norman (HVN). When the dollar was flying high, these companies were hurt as Aussie consumers used the greater purchasing power to buy from overseas online retailers. While it appears obvious the consumer can now get a better deal shopping at home, if lagging consumer sentiment leads to tightening wallets, who will benefit?
What this implies is that investors should see a falling AUD as a potential medium to long term catalyst for companies most worthy of interest, regardless of the direction of the dollar. As a hedge against our own economy, stocks with the highest potential are generally those with the most exposure to US markets. The following table includes five stocks with such potential. Although there are other stocks to consider, we limited our selection to those with two year earnings growth forecasts in excess of 10%. Here is the table.
52 Wk. % Change
2 Yr. Earnings Growth Forecast
5 Yr. Est. P/EG
Dividend Yield (Tax Adjusted)
3 Yr. Total Return
James Hardie Ltd
There are a few companies around the world whose products are so well known they take on the properties of nouns and verbs. Today, we are no longer told to “search it” but rather to “Google it.” As far back as the 1980’s US contractors and do-it-yourself homeowners were walking into lumber yards and construction supply houses and asking, not for underlayment or cement board, but for HardieBacker, the flagship product of James Hardie Industries (JHX).
While we tend to restrict our thinking of “high tech” companies to those in the digital world, Hardie is an example of a company with an array of residential and commercial building products developed with advanced technology. This is especially true in Hardie’s paint and weather barrier lines of products. Although Hardie operates in Australia, New Zealand, the Philippines, Canada, the UK, and France, about 80% of its revenue comes from its US market. As you know, construction in the US ground to a halt following the GFC and JHX shares were crushed. Here is a ten year price chart for the company.
The share price recovery is impressive, considering the US construction market has yet to fully recover; at least in the eyes of some experts. GDP (Gross Domestic Product) in the US is supposedly running around 4%, which is high for them of late; but housing starts continue to lag. Hardie’s Q1 Financial Results reported on 15 August disappointed investors, and management admitted they had overestimated the strength of the US recovery. The company lowered its full year guidance and the share price dropped from $14 prior to the earnings release to the 18 September close of $12.60, a loss of 10%. On 17 September Deutsche Bank reiterated its Buy rating on JHX with a price target of $18.60; a significant raise from the previous target of $16.16 as of 17 August.
Hearing implant manufacturer Cochlear Limited (COH) has dropped from number one on the ASX Top Ten Shorted Stock list to number 3. In the not too distant past this company was a leading candidate to become the first ASX share to trade at $100 since another stock in our table, CSL Limited (CSL) reached $109.27 before splitting in October of 2007. In September of 2011 Cochlear was forced to issue a product recall and investors fled for the exits. Here is a five year chart for COH.
In the eyes of some analysts the recall issue opened the door for Cochlear’s principal competitor, Sonova Holdings subsidiary Advanced Bionics, to grab market share. Cochlear is the acknowledged “Rolls Royce” of the implant industry and still controls around 70% of a global market that should grow dramatically as Baby Boomers around the world retire. Contrarians may look at the competition between Cochlear and Advanced Bionics and see room for both to prosper.
Cochlear has released impressive new products over the last year, including the revolutionary Nucleus 6 with a sound processor that uses directional microphones to filter out background noise and the ability to wirelessly connect with smartphones. However, in the critical US market, the FDA delayed approving the full range of features available in the Nucleus 6, hurting Cochlear sales and boosting the market share of Advanced Bionics with its own competitive products. On 15 September the wireless add-ons to the Nucleus 6 received FDA approval and will be available on 18 November.
Despite these difficulties the company reported a 7% increase in total revenues for the Full Year 2014, but a 29% drop in profit, reportedly due to a patent dispute. The new products were released in the first half of the year, impacting revenue and profit only in the second half. Company management expressed optimism for FY 2015, based on solid sales of new products in the second half of 2014.
Analysts are uniformly bearish on COH, with Citigroup reiterating its Sell rating on Cochlear on 18 September. There are seven analysts with an Underperform rating on COH shares and 3 at Sell. Apparently there are more than a few contrarian investors who disagree, as the share price is up since the release of Full Year results. Here is a three month chart showing the move.
CSL Limited (CSL) makes blood plasma products, vaccines, and assorted pharmaceuticals. It has been one of the best performing ASX stocks in history. The shares closed the first day of trading in 1994 at a split adjusted $0.35. The following chart from Yahoo Finance Australia tracks the remarkable performance.
Apparently investors were becoming concerned about the company’s ability to continue growing as the share price began to show some uncharacteristic volatility for most of 2014. The 2014 Half Year Results released on 12 February showed a modest 5% revenue increase and a 3% rise in net profit after tax (NPAT). The Full Year Results released in August reversed the trend, with a 7.7% jump in revenue and a 7.8% increase in NPAT. A one year price chart shows the downs and ups for CSL.
Looking at CSL’s Full Year Financials shows reported results were slightly lower (1%) due to currency variations, so the company should benefit somewhat from a falling AUD. Of more relevance is the growth in the size of the market that needs its products. Analysts are bullish on CSL, with three at Strong Buy and seven at Buy. On 26 March 2014 Australian Fund Managers named CSL the top listed Australian company at the Corporate Performance Awards in Sydney. There is a blip on CSL’s positive horizon as a competitor Baxter International (NYSE:BAX) received FDA approval for a competitive product on 16 September.
ResMed Incorporated (RMD) is in the business of developing medical equipment to diagnose and treat respiratory disorders. The product lines include masks and humidifiers but the company’s most important revenue source is its devices for treating sleep apnea. Although the company is global in scope, its principal market is the US, where the company is headquartered. RMD trades on the NYSE and the ASX. Its US exposure is one reason to like the company, but the growth in ageing populations around the world is a better one. Analysts like the stock, with four at Strong Buy and four at Buy.
ResMed’s share price is up 120% over 5 years but year over year has been less than stellar for investors. The company gets more than half its revenue from its US and Latin American operations, where sales have been down slightly. Here is a one year chart for RMD.
The final share in our table is logistical solution provider Brambles Limited (BXB). Although the company makes Reusable Plastic Crates (RPC) and Containers, it is perhaps best known for its recyclable blue CHEP pallets, found in more than 50 countries where freight is palletized for shipping.
As one would expect due to its exposure to global economic activity, the company’s share price has suffered since the GFC but is gradually recovering. Here is a ten year chart.
On 20 August the company reported Full Year 2014 results that showed a reported 6% revenue increase along with a 5% profit increase. In “constant currency”, which adjusts for foreign exchange rates, the increase was 1% higher for both revenue (7%), and profit (6%). Brambles is the largest supplier of pallets, crates, and containers and its pooling business model allows its customers to eliminate the need to purchase and maintain their own shipping packaging options. This is not an exciting company and it poses the risk of exposure to declining economic activity, as has happened to the company’s European business. Brambles management predicts solid single digit growth between 7 and 10% in the near future due to anticipated price increases, long overdue in the US and Europe as well as expansion into Latin America, Central Europe, and Asia. On 9 September Brambles announced the acquisition of the Ferguson Group, a UK based supplier of shipping containers for the oil and gas sector. This gives Brambles exposure to a previously untapped sector. Investors liked what they heard. Here is a three month chart for BXB showing market response to the 20 August earnings announcement and to the 9 September Ferguson Group acquisition.
Analysts are fairly bullish on Brambles, with two Strong Buys, seven Buys, four Holds, and only one Underperform.
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