Rising S&P 500 foreign sales increase corporate America s leverage to a weak dollar.

Among S&P 500 companies that report international revenues, foreign sales* rose to 47.9% in 2008 from 45.8% in 2007 and only 32.3% in 2001. As foreign sales of S&P 500 companies continue to rise, corporate America s leverage to a weak dollar increases. With strong double digit year-over-year S&P 500 earnings per share (EPS) growth widely expected to resume by the fourth quarter, we believe a weak second half for the greenback would be a timely catalyst in helping S&P 500 companies meet investors expectations.

The information technology and energy sectors had the highest percentages of foreign revenue in 2008 at 55.3% and 50.5%, respectively. Conversely, the financials sector lagged with only a 34.1% overseas sales contribution (see chart on page 9). In light of the challenging global economic environment, defensive, counter-cyclical sectors like consumer staples and health care saw the largest year-over-year increases in foreign sales. Conversely, a commodity-related sector, energy, suffered the biggest year-over-year decline as oil prices weakened dramatically in the second half of 2008. Foreign revenue breakdowns were few in telecommunications and utilities, resulting in a lack of meaningful statistics for these sectors. These two sectors, which represent only 7.4% of S&P 500 market cap, are excluded from this analysis.
Not surprisingly, at the regional level, Europe (including the U.K.) and Asia comprised the largest percentage of S&P 500 foreign sales at 27.7% and 13.2%, respectively (see chart).
Unfortunately, S&P 500 foreign revenue reporting still lacks uniformity. As such, 37.85% of 2008 overseas sales did not include a specific international region of origin.
Since peaking at 89 in early March, the U.S. Dollar Index, a trade-weighted index that measures the greenback s performance versus key currencies, has been drifting lower (see chart). We believe the primary driver of recent dollar weakness is declining risk aversion amid hopes the worst is over for the global economy. After averaging a 12.8% year-over-year gain in the 2009 first quarter, the index averaged a smaller 11.9% year-over-year rise in the second quarter, and is up only 5.6% year-over-year in the third quarter through July 21. In the fourth quarter of 2008, the index averaged 84.1, 6.6% above its current level of 78.9.
If the greenback remains steady or declines further, we believe its current year-over-year gains will quickly disappear, and currency will morph from a headwind to a tailwind for S&P 500 profitability.
With foreign sales approaching half the total for S&P 500 companies, we believe currency has the potential to have a bigger impact than in the past. And with fourth-quarter S&P 500 EPS widely expected to show strong year-over-year gains, we see positive currency translation being a much-needed positive for corporate America in what is likely to remain a difficult operating environment.
*These figures exclude exports and are based on the 253 S&P 500 constituents that reported full 2008 foreign sales, where the percentage of foreign sales represented between 15% and 85% of the total. S&P Index Services compiled this data and believes this is currently the best approximation for calculating aggregates.
Alec Young
International Equity Strategist

27-Jul-2009 07:46:41 (14440285)   Copyright 2009 The McGraw-Hill Companies, Inc, Standard & Poor's, a division of The McGraw-Hill Companies, Inc., and their affiliates (collectively, "S&P"). Reproduction of this content in any form is prohibited except with the prior written permission of S&P.