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Weakening Dollar: Fly into some profits

Posted April 23, 2008

“Two companies worth comparing are Airbus and Boeing.  A falling dollar has dramatically hurt Airbus, while providing Boeing with a fantastic, but temporary, competitive advantage.” - Andrew Snyder

By Andrew Snyder

Baltimore (TFN) - At least a dollar is still worth a dollar here in the United States, because throughout much of the world it is not worth nearly what it used to be.

As of yesterday’s new record high, it will cost you $1.60 to buy a Euro.  Thanks to rising inflation rates and the threat of higher interest rates in Europe, the dollar’s decline may not end anytime soon.

The news is great for some companies.  In fact, a strong Euro is the only thing keeping them out of the red.  But for other companies, a weak dollar could spell huge trouble, and lots of red ink.

Two companies worth comparing are Airbus and Boeing.  A falling dollar has dramatically hurt Airbus, while providing Boeing with a fantastic, but temporary, competitive advantage.

Who’s bright idea was that?

Although Airbus is located in France, its planes are priced in American dollars.  That creates some real problems.  The majority of the company’s metals, parts, and labor costs are valued in Euros.  The further the spread between the euro and the dollar, the smaller the company’s margins. 

Proving the point, just this morning, Airbus announced a major price hike for its planes.  To help cover rising costs, some of Boeing’s planes will see their price tags rise by as much as $4 million.  That is not good news for a company trying to maintain its competitive stance.

It is good news, however, for the competition.  Seattle-based Boeing does not mind the dollar’s decline one bit.  Its planes are priced in dollars and most of the company’s operating costs are valued in dollars.  In Boeing’s eyes, the stronger the euro, the better the opportunity to raise international sales. 

Don’t believe me?  Just look at the company’s current record-long order backlog.  Or its 38% jump in quarterly earnings.  Or its 14% rise in share price over the past few weeks.

Don’t worry, the French won’t fight

With its French competitor stuck in a dollar-induced pricing pickle, Boeing has a shot at strengthening its competitive position.  This is a good opportunity for shareholders to take advantage of Boeing’s strength. 

If you are an options investor, this is your chance to buy some calls.  For a great shot at profits, pick up a few of Boeing’s August 90 calls (BAHR.X).  There is a very good chance by the end of the summer, these options could be selling at quite the premium.

The falling dollar will eventual shake the American economy and even Boeing’s profit potential, but those days are still making their way to the horizon.  For now, take advantage of the strong European currency and bank some gains while you still can.

 

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Posted by Andrew Snyder · Filed Under US Stocks and Markets 

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