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As recently as July last year the AUD continued to puzzle experts with its strength relative to the US dollar.  At that time the AUD was at 92 cents despite falling commodity prices and a relatively sluggish Australian economy.  NAB forecasted a fall to 85 cents by year end and Goldman Sachs was predicting 88 cents.  A one year chart from Yahoo Finance for the AUD/USD movements shows both were wrong.

According to a recent survey of economists reported by Bloomberg the average prediction for year end 2015 is 78 cents, with a high of 92 cents and a low of 70 cents.  Commonwealth Bank issues a quarterly foreign exchange report entitled Aussie Dollar Compass.  The report pinpoints the level of the dollar at which Aussie importers and exporters become “uncompetitive.”  The latest report shows that point for exporters is 94 cents and for importers it is 75 cents.  A survey of business sentiment accompanying the report noted that business owners surveyed felt the AUD would be at 85 cents by September 2015, but cautioned that the survey was taken in November.  On 3 February Goldman Sachs cut its 12 month forecast for the AUD to 72 cents.

So where is the dollar going?  Supposedly renowned economist John Kenneth Galbraith once said “the only function of economic forecasting is to make astrology look respectable.”   Nevertheless speculation on how low the dollar will go is likely to fuel a bevy of articles on stocks to benefit from a falling dollar, including this one.

It is only common sense that a lower AUD makes our products sold in countries paying in US dollars more attractive.  Conventional wisdom tells investors to search for stocks generating substantial revenues from US dollars. These companies benefit when the dollars are converted.

However, there is another side to this coin – costs are also part of the picture.  In today’s world many companies are both importers and exporters.  Companies importing material to produce what they export could fail to see much benefit from the falling dollar.

For the average investor, determining an accurate picture of US revenue can be difficult.  Some companies report financials based on business segments, without a country breakdown.  In addition, many lump the US into a market segment including Canada and/or Latin America.  In addition, the average investor would need to know if costs are in Australian dollars or other currencies. A starting point is to search the location of a company’s manufacturing facilities.   An example here is Sirtex Medical (SRX), an admirable stock by many measures, but its manufacturing operations are in the US and Singapore, dampening the impact of a falling dollar.

Currency hedging strategies many businesses employ to protect against currency exchange risk pose an even more formidable problem to the average investor.  Finding information on a company’s hedging efforts invariably leads one to the Accounting Notes portion of a company’s financial reports.  Even for those willing to take the time and effort to dig into the statements, understanding accounting language can be challenging.

Having said that, there are stocks known to generate significant revenue in US dollars, but just as no investment decision should be based on a single attractive criterion, there are other factors to consider when researching any list of top stocks to benefit from a lower AUD.  We feel chief among them is historical earnings and shareholder return performance, as well as future earnings growth.

The following table includes five stocks that we feel could measure up, listed alphabetically.

Company

(CODE)

Share Price

52 Week % Change

P/E

5 Year

 Average P/E

3 Year

Total Shareholder Return

5 Year

Total Shareholder Return

2 Year

Earnings Growth Forecast

Ansell

(ANN)

$24.28

+26%

49.3

20.9

+20.4%

+18.9%

+24.8%

Brambles

(BXB)

$10.36

+15%

26.1

20.7

+15.4%

+11.6%

+13%

CSL Ltd

(CSL)

$86.19

+26%

26.4

21.9

+40.2%

+22.5%

+21%

James Hardie

(JHX)

$13.98

+5%

25.43

32.7

+29.5%

+16.6%

+66%

ResMed

(RMD)

$8.55

+68%

25.9

22.3

+47.8%

+22.6%

+10.2%

All of these companies derive substantial revenue from the US, with Ansell Limited (ANN) the lowest at around 38%.  Ansell has four business segments, with three being healthcare related.  The company provides “protective solutions” for industrial use as well as for healthcare professionals and individual consumers.  Products range from sophisticated clinical protection devices to gloves and clothing to condoms.  Ansell’s largest geographic market is Europe.  Although the AUD is also weaker against the Euro, the economy across Europe pales in comparison to the US and the latest debt crisis in Greece is not helping.

Some investors may take pause when looking at this company’s outsized P/E.  Indeed, none of these five stocks could be considered a bargain hunters delight.  We included each company’s five year average P/E to make the point that performance sometimes trumps the vaunted P/E.  In the last three to five years investors were sure to read advice to stay away from these stocks based on high valuations.  Yet they performed.  The following chart tracks the price movement of ANN versus the AUD since it began its slide two years ago.

Of course it may be mere coincidence, but it is interesting to note the ANN share price began its ascent around the same time the AUD’s decline accelerated.

Along with fellow health care stocks CSL Limited (CSL) and ResMed Incorporated (RMD), Ansell is in the sweet spot for the upcoming increases in health care needs due to the ageing of the global population.  Ansell reported Half Year Earnings on 9 February, showing a 20% increase in sales, with a 16% rise in earnings per share.  Management attributed the results to solid growth in the company’s US business.  The company is not without risks, as its raw materials costs are rising and analysts at Citibank are sounded warning bells about the earnings risks related to the Euro, which might negate the positive impact of the lower AUD.

Brambles Limited (BXB) has manufacturing and distribution facilities all around the world for its line of CHEP Pallets, containers, and reusable produce crates (RPCs), with the pallet lines accounting for about 75% of the company’s revenue.   About 55% of the company’s pallet revenue comes from the Americas.  On 3 November the company announced a quarterly increase in sales of 6% and upgraded its forward guidance.  The following chart shows the steady rise of the BXB share price as the AUD fell.

Blood plasma therapies and vaccine provider CSL Limited (CSL) is another stock whose lofty valuation sends some investors scurrying for cover while those intrepid souls who like growth have been rewarded very well.  Its ten year average annual rate of total shareholder return is 25.4%.  In the Half Year results reported on 11 February the company lowered its 2015 NPAT (net profit after tax) guidance from 12% to 10%, driving the share price downward despite the positive results in revenue and profit.  With promising growth in its flu vaccine line in China, the price drop could be a buying opportunity.  Here is a one month price chart for this ASX stalwart, the largest Bio Pharma on the exchange.  

Building products supplier James Hardie Industries (JHX) has three manufacturing facilities in Australia, along with a site in and the Philippines.  Since the company’s largest market is the US, there are nine manufacturing facilities there.  The US and Europe account for more than 75% of the company’s revenues.

In a 2 February Investor Road Show Presentation the company stated the US housing recovery is still “uncertain” and that its input costs there have risen “significantly.”  Management announced it would be looking into its sourcing strategies to help reduce costs.

JHX is a regular on the list of stocks to benefit from a falling dollar, but the company also serves as an example of how costs can erode the earnings boost from the more favorable exchange rates.  However, it is hard to ignore the robust 66% earnings growth forecast, which projects the FY 2014 EPS of $0.244 per share ballooning to $0.672 by FY 2016.  The stock price has risen about 40% over the last two years.  Here is the chart.

Developer and manufacturer of products to treat sleep disorders ResMed Incorporated (RMD) has seen its share price rise close to 70%, with a big boost coming following the announcement of Q3 financial results on 27 January.  Revenues were up 10% but on a constant currency basis, which controls for exchange rate fluctuation, revenues rose 14%.  In addition, the company reported double-digit growth in the Americas and an 8% uptick in Europe and the Asia Pacific Region (16% on a constant currency basis.)  Investors like what they heard, sending an already accelerating stock price up about an additional 17%.  Here is the chart.

Research company Markets and Markets estimates that the global market for devices to treat sleep apnea will approach $19.72 billion by 2017.  In addition, respiratory disorders like sleep apnea are among the most ignored medical conditions.  ResMed’s main competition is New Zealand based Fisher & Paykel Healthcare Limited (FPH).  FPH has a two year earnings growth forecast of 15.9% and could also benefit from a weakening NZD.  Right now, however, ResMed is the market leader in the US but FPH is developing competitive products to grab market share.  In terms of share price, this is a horse race, with both companies showing outstanding capital appreciation over the last five years, despite the high P/E ratios.  Here is a chart comparing the two.

 Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.