With interim reporting season getting into full swing this week, the stock market will be honing in on company’s outlook statements – with particular interest in what they say about currency. The Australian dollar looks to be heading toward stormy weather, which is good news for the contingent of Australian companies that report their earnings in US dollars, or earn money overseas.
The US dollar enjoyed a strong performance in 2018: at the end of the worst year since the financial crisis, the greenback had gained against all major global currencies except the Japanese yen, and the US Dollar Index – an index of the value of the US currency relative to a basket of its major trade partners’ currencies – gained 4.6%. The Australian dollar lost 9% against the US$ in 2018.
The strength of the US$ last year came about through the healthy economic growth of the US, the fiscal stimulus which boosted yields in Treasury markets, a hawkish Federal Reserve lifting rates four times, and fund repatriation by US firms to take advantage of lower tax rates.
After this performance in 2018, the US dollar’s rally was expected to come under significant pressure heading into 2019, as global monetary policy began to converge with that of the US. The comments from the Fed in January that it would put further interest rate increases on hold – and be “patient” when it came to making any move on interest rate increases – seemed to conform with this view, as the buoyant month on stock markets sparked a “risk-on” move that saw the US$ weaken, and give up ground against most major currencies in January.
However, in early February, data that pointed to a spreading economic slowdown in Europe had the US currency buzzing again, as a safe-haven move. In the first full week of February, the Euro recorded its worst weekly drop against the dollar in more than four months.
For the Australian currency, the renewed vigour in the US$ couldn’t have come at a worse time, with the Reserve Bank of Australia (RBA) last week cutting its economic growth forecasts, saying it sees the Australian economy growing by 2.5% in the year to mid-2019, down from an earlier expectation of 3.25% growth. Economists reacted by pencilling-in two cuts to the cash rate before the end of the year, which market consensus feels could cause the Aussie dollar to fall well below the 70-US-cents level.
That would have major ramifications for the earnings of Australian companies that generate revenue overseas. For Australian companies that earn revenue in the US dollar, the weaker the Australian currency is against the US dollar, the more revenue they earn in A$ terms. Each ‘unit’ of US dollar-denominated revenue buys more Australian dollars when it’s converted to the weaker local currency in the reported financial results.
A weaker A$ has an even more direct effect for shareholders in the Australian companies that actually report their results in US dollars: any change in the exchange rate directly affects their results. The twice-yearly dividend payments will be higher when converted to A$, depending on the exchange rate at the time the dividend hits shareholders’ bank accounts. These stocks should also show a benefit in the share price when the A$ is weak.
Let’s look at the market’s consensus view on 12 stocks that report in US$.
- CSL (CSL, $194.53)
According to the consensus of analysts’ forecasts collated by FN Arena, CSL will report earnings of 382 US cents in FY19 (year to June), up from 242.9 US cents in FY18. In FY20, analysts expect CSL to earn 483.8 US cents.
With an unfranked dividend of 172 US cents expected for FY19, CSL is not a big dividend play: at the current exchange rate, FN Arena says that represents a yield of 1.4%. But with an analysts’ consensus target price of $211.45 – or 8.7% above the current price of $194.53 – CSL still looks to be an attractive growth proposition.
As with all of these stocks, the growth story is more important than the exchange rate. The point about CSL – which looks expensive on 33 times expected FY19 earnings – is that it is well-positioned to grow, picking up the tailwind of treatments for ageing populations. The company’s Plasma division is the largest plasma collector in the world, from which a variety of medicines are created. CSL is also involved in treatments for neurological and bleeding disorders, immunodeficiencies, hereditary angioedema (severe swelling) and Alpha-1 Antitrypsin Deficiency, an inherited condition leading to lung or liver disorders.
- James Hardie Industries (JHX, $16.54)
Building materials producer James Hardie generates 80% of revenue in the US, where the company has substantial production capacity. Hardie operates in residential and commercial construction and as such is affected by swings in the housing and construction markets, especially in the US. In FY19, analysts expect JHX to earn 69.5 US cents in earnings per share (EPS), more than doubling the 33 US cents earned in FY18. In FY20, analysts see EPS rising to 78.6 US cents.
Although the unfranked yield of 3.5% for FY19 is also not a top-echelon yield, analysts are highly positive on James Hardie: FN Arena’s collation gives an analysts’ consensus target price of $20.95, almost 27% higher than current levels.
- Fortescue Metals Group (FMG, $6.04)
Iron ore miner Fortescue is expected to earn 35.7 US cents in the year to June 2019, up from 28.2 cents in FY18. The expected dividend of 23.5 US cents translates to a fully franked yield in an Australian investor’s hands of 5.5%, but FMG is paying the price for a very strong share price run since mid-2018: at $6.04, the stock is well above its analysts’ consensus price target of $5.22.
- BHP (BHP, $35.87)
In FY19 (year to June), diversified miner BHP is expected to report earnings of 182 US cents, up from 168 US cents in FY18. The expected fully franked dividend of 225.5 US cents would represent, at current foreign exchange levels, a gross yield of 8.9%, which is attractive – but BHP is also seen as fully valued by analysts, with a consensus target price of $35.79.
- Rio Tinto (RIO, $91.12)
Unlike Fortescue and BHP, diversified miner (and iron ore heavyweight) Rio Tinto will report full-year results in the current reporting season, for calendar 2018. FN Arena’s collation projects RIO to report earnings of 533.1 US cents in 2018, up from 490.4 US cents in FY17. From that, a dividend of 317.9 US cents is expected, up from 290 US cents in 2017, and equating, at the current exchange rate, to a fully franked yield to an Australian investor of 4.9%. But analysts see only downside in RIO, with a consensus target price of $86.94.
- Woodside Petroleum (WPL, $34.19)
Also a calendar-year reporter, Woodside Petroleum is forecast by FN Arena to report EPS of 156.7 US cents in 2018, up from 122 US cents in 2017. In 2019, analysts expect Woodside to earn 171 US cents. A dividend of 125.8 US cents is expected for 2018, converting on current rates to a fully franked dividend yield of 5.2%. On top of that, analysts have a consensus target price of $36.41 on WPL, implying 6.5% upside if achieved.
- Santos (STO, $6.36)
Another oil and gas heavyweight with a December balance date is Santos, where analysts are looking for EPS of 28.7 US cents in 2018, after a loss of 17.3 US cents in 2017. After no dividend last year, a payout of 8.4 US cents a share is envisaged, which would represent about 1.9%, fully franked. At an analysts’ consensus target price of $6.76, the implied upside is 6.3%.
- OilSearch (OSH, $7.70)
Completing the trinity of full-year 2018 petroleum earnings reports is the PNG-focused OilSearch, where analysts expect EPS of 23.7 US cents, up from 19.8 US cents in 2017, and flowing into a dividend of 10.3 US cents. At the same yield as Santos, 1.9% – but unfranked – OSH does not excite on yield grounds, but the capital growth prospect is a touch more interesting: with analysts having a consensus target price of $8.53, OSH offers implied upside of 10.8%.
- Computershare (CPU, $18.60)
Global securities registration leader Computershare is expected to post a strong improvement in FY19 earnings (year to June), with 68.6 US cents expected, up from 55.2 US cents in FY18. But the expected dividend, at 38.7 US cents, is likely to be lower than the 40 US cents paid in FY18. Computershare’s yield to an Australian investor is an uninspiring 2.9%, 20% franked, and there is no joy either in valuation: with a consensus target price of $17.91, analysts see downside risk prevailing.
- QBE Insurance (QBE, $11.15)
After a shocker of a year in 2017, which saw a loss of 91.5 US cents, analysts are looking for a big turnaround for insurer QBE, with EPS of 57 US cents forecast for calendar-year 2018. A big jump in dividend is also expected, to 47.2 cents in 2018 versus 26 US cents in 2017. That implies a yield of 6%, 50% franked, and there is reasonable value seen on analysts’ consensus target price: at $12.27, the implied upside settles at 10%.
- ResMed (RMD, $13.71)
Medical device heavyweight ResMed is expected to report EPS of 35.5 US cents in FY19 (year to June), up from 22.1 US cents in FY18, with a slight increase in dividend to 15 cents – placing RMD on an unfranked yield of 1.5% on current exchange rates. But growth is the attraction for the sleep-breathing device market leader, and RMD does appear to offer 10% upside, with an analysts’ consensus target price of $15.08.
- Amcor (AMC, $14.27)
Although analysts expect EPS to fall at packaging group Amcor in FY19 (year to June), with 61.6 US cents predicted, down from 62.6 US cents in FY18, a rebound is seen in FY20, when AMC is expected to earn 68.9 US cents. The FY19 dividend, projected to be lifted from 45 US cents to 45.5 cents, comes across as a 4.5% unfranked yield to an Australian investor. On potential upside, analysts have a consensus target price of $15.22.
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