The Effects of a Strong Dollar: Philip Morris International, Inc. (PM), Kellogg Company (K), McDonald’s Corporation (MCD)

There is no doubt that the U.S. dollar is getting stronger. During the week ending March 5, the CFTC reported that net dollar longs reached a seven-month high of $23.57 billion, the largest value since July 17, 2012. This net long position was significantly above the net long position of $14.39 billion reported the previous week.

In addition, the DXY (the index measuring the U.S. dollar against a basket of currencies) has been in a rising channel since the beginning of 2011 and is on track to surpass its two year high sometime this year.

How does this affect companies?

So how does the strong dollar affect earnings?

Throughout 2012, the U.S. dollar was strong as the euro crisis drove investors into safe haven assets such as U.S. government securities. In addition, investors were looking for safety in currency as the euro was effectively devalued and it looked like the financial system in Europe was going to collapse.

According to the DXY index, the dollar was almost 10% stronger in 2012 than in 2011, so how did this affect earnings?

Philip Morris Earnings Report

Philip Morris International Inc. (NYSE:PM)

Revenue 2012 2011 Change Including
Currency Translation
Change Excluding
Currency Translation
EU $8,526 $9,212 -7.40% 0.30%
EEMA $8,332 $7,881 5.70% 11.60%
Asia $11,198 $10,705 4.60% 5.70%
Latin America and Canada $3,321 $3,299 0.70% 6.60%
Total $31,377 $31,097 0.90% 5.70%

Figures in millions

Philip Morris International Inc. (NYSE:PM) has no revenue from inside the U.S., so it has been hit the hardest by a strong dollar. As shown above, the weakness in the euro during 2012 forced the company’s European revenue to contract 7.4%.

Without the weak euro, revenues would have grown 0.3%. Furthermore, revenues in Asia took a hit, growing only 5.7% after the effect of the strong dollar. Excluding the latter, revenues would have grown 11.6%. Overall, the strong dollar removed 4.8% of Philip Morris International Inc. (NYSE:PM)’ organic revenue growth and $0.23 from Philip Morris International Inc. (NYSE:PM)’ 2012 EPS.

A continuation of dollar strength is going to hit Philip Morris International Inc. (NYSE:PM) hard, ruling out almost all of its potential revenue growth.

McDonald’s Corporation (NYSE:MCD)

2012 2011 Change Including
Currency Translation
Change Excluding
Currency Translation
Revenues $27,567 $27,006 2% 5%
Operating income $8,604 $8,529 1% 4%
Net income $5,464 $5,503 -1% 3%
Earnings per share – diluted $5.36 $5.27 2% 5%

Figures in millions

McDonald’s Corporation (NYSE:MCD) did suffer from the strong U.S. dollar but not to the same extent that Philip Morris International Inc. (NYSE:PM) did. Excluding currency translation, revenues were up 5% for 2012. However, after the inclusion of the currency translation, revenues only gained 2%.

Unfortunately, although net income rose 3% year over year excluding the effects of currency, McDonald’s Corporation (NYSE:MCD) net income actually fell after translation into U.S. dollar. The strong dollar wiped 4% from McDonald’s Corporation (NYSE:MCD) net income growth for 2012.