The low Canadian dollar was perhaps the most interesting factor behind Teck Resources Ltd.’s unexpectedly strong earnings report on October 22.
B.C.’s second-largest public company’s (TSX:TCK.B) share price leapt more than 5% after CEO Don Lindsay told analysts that Teck’s “revenues were helped by the strong U.S. dollar.”
Its share price has since dipped below those gains but the immediate reaction was positive.
Lindsay commented on the conference call that he had cut his company's operating costs across several business units and that Teck enjoyed savings from low oil prices, but it was his thoughts about the low Canadian dollar that connected his company with what has been a trend this earnings season.
The U.S. greenback has gained more than 17% against its Canadian counterpart in the past year.
Canadian companies that have significant sales in the U.S. but report earnings in Canadian dollars have therefore coasted on favourable foreign exchange rates to beat earnings expectations and enjoy a hiked share price.
U.S. companies that report in U.S. dollars and have substantial global sales, conversely, have had their share prices pummelled.
“The Canadian dollar has been weaker for longer than the market expected and has dropped more than many expected,” said Thane Stenner, who manages portfolios for ultra-high-net-worth individuals at StennerZohny, which is part of Richardson GMP.
“Therefore Canadian companies are beating previous guidance accordingly.”
That was the case for B.C.-based Pacific Insight Electronics Corp. (TSX:PIH) on September 18, when it credited “favourable foreign exchange impacts” for its unexpectedly high quarterly profit.
The share price of the company, which sells electronics systems to the transportation industry, jumped 6.8% the next day.
Hudson’s Bay Co. (TSX:HBC), meanwhile, has reaped foreign currency gains from sales at its U.S.-based Saks Fifth Avenue stores.
In the U.S., meanwhile, blue-chip companies such as IBM (NYSE:IBM), American Express Co. (NYSE:AXP), Harley-Davidson Inc. (NYSE:HOG) and Whirlpool Corp. (Nasdaq:WHR) are among the many U.S. firms with substantial global sales that watched share prices plunge following disappointing earnings blamed at least in part on the strong U.S. dollar. Mitigating the foreign currency gain for some Canadian companies that have sales in the U.S., however, is that costs are also in U.S. dollars.
About 68% of Tree Island Steel’s (TSX:TSL) sales for nails, wire mesh and other products are in the U.S., CEO Dale MacLean told Business in Vancouver.
He added that about 67% of Tree Island’s costs are also in U.S. dollars, which provides it with what MacLean called a “natural hedge.” Regardless, profit from Tree Island’s U.S. business is magnified when converted into Canadian dollars.
The company is scheduled to report its third-quarter earnings on November 5.
Hardwoods Distribution Inc. (TSX:HWD) is another B.C.-based company reaping foreign exchange gains by supplying products to the U.S. housing sector. Compared with the same quarter last year, its 2015 first-quarter revenue increased by $34.2 million to $135.1 million; $11.8 million of that increase was directly attributed to the strong U.S. dollar, according to corporate filings.
Not all Canadian companies that have substantial U.S. sales can display glittering balance sheets thanks to currency volatility. Some, such as Canadian Pacific Ltd. (TSX:CP), have billions of dollars in U.S.-
greenback-denominated debt.
B.C. companies such as Lululemon Athletica Inc. (Nasdaq:LULU) and Village Farms International Inc. (TSX:VFF) report in U.S. dollars and therefore could be hurt when converting Canadian sales into that currency.
“Obviously, a lot of our Canadian costs are in Canadian dollars, so the exchange rate helps us on the costs and it hurts us on our Canadian sales,” said Village Farms CFO Stephen Ruffini.
His company generates more than 80% of its revenue from selling tomatoes, and about 80% of its total sales are south of the border.
“It’s hard to say that [a low loonie] helps tremendously on the cost side because, as a greenhouse company, a lot of our inputs [such as natural gas] are in U.S. dollars or euros.” •
