(By Mani) A stronger dollar versus euro is expected to dampen the operational results of the companies with profitable European operations, implying significant sales and EPS headwinds.
The EUR/USD rate has fallen 3 percent from the start of the year and 6 percent from the end of the first quarter. A strengthening US dollar has the effect of depressing the dollar based value of foreign revenue.
Let's see how a strong dollar impact the automakers and auto parts suppliers in the U.S.
At the outset, the primary reason a strong dollar hurts U.S. automakers get payment in a less valuable currency after the cars are exported, and so when they convert back to dollars, they tend to lose money.Among the automakers, both General Motors Co. (NYSE:GM) and Ford Motor Co. (NYSE:F) are expected to lose money in Europe this year. The lower Euro would reduce GM and Ford sales by a little over $1 billion.
About 26 percent of Ford's sales are in Europe. Ford has guided to a $500 million to $600 million pre-tax loss in Europe this year after losing $148 million in the region during the first quarter. Europe has been a thorn in Ford's bed for some time, and weakness in the Euro coupled with poor sales, the automaker could face a tough double whammy.
GM has been facing issues with Europe, too, where it lost $256 million in the first quarter, casting doubts on whether GM's restructuring efforts in the region is paying dividends.
"The fx change would imply the European losses would be converted a smaller USD loss. Consequently, this is a slight positive for Ford. That said, this does not materially change our EPS estimates or price target," UBS analyst Colin Langan wrote in a note to clients.
Like Ford, the depreciation of the Euro is a small positive for GM given estimated $1.3 billion loss in the region. Also like Ford, the impact is not material for GM. However, the forex change would also reduce losses from these regions by less than $50 million.