Ruined vacation plans, higher cauliflower costs, egregious gas prices—the collapse of the Canadian dollar is taking a toll on consumers. But while we may have to shell out more for imported goods, there is a way to profit off our nosediving currency: Own stock in companies that get paid in American dollars.
The Canuck buck’s 14% plunge over the past 12 months has made every U.S. dollar of revenue that much more valuable. And most experts think the loonie will stay low for the foreseeable future, due to depressed oil prices and the country’s deteriorating terms of trade. In January, Macquarie Group analyst David Doyle predicted it would fall to 59¢ (U.S.) by the end of the year.
With the dollar now at the lowest level it’s been in a decade, receipts in foreign currency are starting to translate into higher earnings, faster sales growth or both. For instance, CCL Industries Inc. (TSX: CCL-B), a Toronto-based packaging company that makes most of its sales outside Canada, saw its earnings per share rise 21¢ in the third quarter due to currency alone. Sales rose 18% year-over-year, nearly 11 points of which was attributable to the currency exchange. It made money off rises in the British pound, euro and Thai baht in addition to the greenback.
Three types of companies benefit most from a lower dollar, says Ryan Modesto, a managing partner with 5i Research in Toronto. The biggest beneficiary is the firm that generates revenues in American dollars but pays most of its expenses in Canadian ones, like CCL. Then there’s the company that sells something in Canadian dollars to U.S. consumers. That $1,000 skiing getaway in Whistler now costs just US$710, which is pretty attractive to travelling Americans. Finally, you have the company whose operations are primarily stateside, but its earnings are reported in loonies. This is the most precarious of the three, because the gain is due to accounting more than anything else. “It only benefits the company if the dollar continues to weaken,” Modesto says.
While the bottom line will grow in all three scenarios, the opportunity really lies in what a company does with the excess cash generated. These companies can increase dividends, buy back stock, reinvest by expanding their product offering or making an acquisition. “We are starting to see some nice dividend growth and acquisitions,” says Justin Flowerday, a portfolio manager with TD Asset Management. “Many still haven’t yet pulled the trigger.”
The obvious risk of playing the currency differential is that the exchange rate reverses and those big year-over-year earnings gains vanish. As with any investment, people should buy appropriately valued high-quality operations that have a history of earnings growth, says Flowerday. You may lose that currency benefit at some point, so you want the company’s fundamentals to be sound.
Examine the share of revenue that comes from foreign markets, how much of the expenses are in Canadian dollars and the growth in non-Canadian locations—now’s a good time to be building a stronger American customer base. And look beyond manufacturers to airlines, railways, retailers and hospitality firms.
The longer the loonie stays low, the better it is for these Canadian stocks. “Companies will really start to benefit in a year or two,” says Modesto. “They’ll have an enhanced ability to compete.”
Five Canadian Stocks with Low-Loonie Potential
RDM Corp. (TSX: RC)
This Waterloo, Ont., firm developed the technology that lets people cash a cheque using a smartphone. It partners with 31% of Fortune 100 companies and is growing in the small-to mid-size company space too.
Stella Jones Inc. (TSX: SJ)
Based in St. Laurent, Que., Stella-Jones makes railway ties and utility poles, 82% of them southward-bound, says 5i Research’s Ryan Modesto.
AirBoss of America Corp. (TSX: BOS)
This Newmarket, Ont., company makes rubber products for the auto, defence and resource sectors. About 70% of its sales are in U.S. dollars, but that will increase. It just bought a defence company in the States.
CCL Industries Inc. (TSX: CCL.B)
The Toronto-based packaging firm generates most of its sales from countries with stronger-than-loonie currencies. In Q3, 56% of its revenue growth was forex related. It has a history of value creation, says Modesto.
Whistler Blackcomb Holdings Inc. (TSX: WB)
American visits to the largest ski resort in the Western Hemisphere peaked in 2003 but are coming back. Overall attendance was up 15% during the most recent fiscal year, despite subpar snow conditions.
MORE ABOUT INVESTING & THE LOONIE:
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- The Bank of Canada is ready to accept pain today for growth tomorrow
- How Canada’s manufacturers can make the most of the U.S. recovery
- Scotiabank CEO Brian Porter is bullish on Canadian exports
- Why Canadian equities are due for a comeback
- What the jitters in the bond market mean for the market as a whole
- How investors can profit from the rise of the robotics industry