It looks like the currency party is finally over. After flirting with parity for a number of years, the loonie is now at its lowest level in 11 years and likely will continue to drop into next year.
The impact on companies is immense. Companies that have products or sales that are valued in U.S. dollars will see higher profits during reporting time. Likewise for companies that are Canadian-based with assets in the U.S., whose values will be inflated when reported back in Canadian dollars.
Unfortunately, a lot of companies won’t benefit from the current low-flying loonie. Those companies will be doing everything they can to cut costs and become more efficient to offset the effects of the weak dollar.
The dollar is very much tied to the price of crude, which has been dropped considerably in the past year, closing this week below $38 per barrel. By comparison, when the price of oil was over $100 per barrel the loonie was at parity or even stronger than the greenback.
Another factor is the greenback itself, which is currently appreciating against a basket of currencies, the loonie included. This doesn’t bode well for the loonie when looking ahead into 2016 as the greenback historically gains ground over the loonie in January, and with the Fed set to possibly start increasing interest rates in the U.S. over the next few weeks, the currently weak loonie might be here to stay for a while.
And finally, the new Liberal government has made a pledge to run deficits and invest in the infrastructure of the country. While these promises are admirable and required for future generations, the thought of running multi-billion dollar deficits is surely to drive the dollar lower, at least in the short term.
Here are some likely benefactors of the current economic climate.
Alimentation Couche-Tard
Alimentation Couche-Tard (TSX:ATD.B) has one of the largest convenience store and gas station networks in the world with over 14,000 locations in North America and countless more in Asia and Europe.
Why will Couche-Tard benefit? A whopping 45% of the company’s earnings come from U.S. sources. As the loonie continues to drop, those U.S. sources will have more weight on the bottom line come reporting time than they did when the currencies were at par.
To put the impact into perspective, revenue for the latest quarter came in at $8.44 billion.
Uni-Select Inc.
Uni-Select Inc. (TSX: UNS) is a manufacturer of automotive parts and paint products. As the loonie drops, Canadian manufacturing becomes more and more attractive to markets abroad; exports more affordable to consumers in the U.S.
The last time the loonie was this low (or even significantly lower), Canadian manufacturers had all cylinders fired up and were seen as very competitive in the industry. Should the current trend continue, there’s no reason why this wouldn’t repeat.
While the loonie is down by over 25% this year alone, Uni-Select is up by over 115%.
