Exchange Rates

The Turbo-Charged Profit Machine

A bottling plant in Neutraubling. Source: Handelsblatt
A bottling plant in Neutraubling.
  • Why it matters

    Why it matters

    Many German companies have benefited from the weak euro, even those that would otherwise have seen little earnings growth. Those likely to benefit the most are companies that produce in Germany and sell a large proportion of their products in the United States.

  • Facts


    • In the third quarter of 2015, the euro was down by more than 15 percent over the same period last year.
    • Three-quarters of publicly traded companies in Germany benefit from the combination of a weak euro and the fact that they produce in Europe while selling at least some of their products in Asia or the United States.
    • The weak euro has also led to sharp increases the share prices of many German companies.
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Fresenius  is having a good run. The price of its shares has risen by more than 50 percent this year and the health-care company is bringing in a series of record profits. In the third quarter, sales grew by 16 percent, to €6.9 billion ($7.5 billion), while pre-tax profit increased by 25 percent, to €1 billion.

But the weak euro, and not the company’s lucrative business involving hospitals and infusion therapies, is behind these strong earnings figures.

In the third quarter, the euro was trading at more than 15 percent less than it was a year ago. Fresenius creates added value the minute it converts its sales in U.S.-dollar markets into euros. Without the weaker currency, Fresenius sales would have increased by “only” 7 percent and profits by 12 percent, or about half as much as the actual figures.

Thanks to the currency effect, companies that produce in Europe but sell at least some of their products in Asia or the United States are seeing additional revenue growth. Three-quarters of publicly-traded companies in Germany benefit from this combination.

In other words, Fresenius is not the exception but the rule.

“The weak euro, along with the decline in the price of oil, is the bigger driver of profits for many German industrial companies,” said Stephanie Lindeck, an analyst with Swiss bank Julius Bär.

Another example: Pharmaceutical giant Bayer’s sales went up by about 11 percent in the third quarter, but only by 2 percent when adjusted for the currency effect. In the company’s important pesticide and seed business, earnings increased by 11 percent, whereas they would have stagnated without the weak euro.

Brand manufacturer Beiersdorf saw its sales go up by 7 percent over the same period. It would have experienced only 2.7 percent sales growth without the currency windfall.

“Products produced in Euroland become cheaper in the United States and Asia, and this makes them even more competitive, and this in turn means these will sell more and crowd out competitors.”

Markus Wallner, analyst, Commerzbank

A pleasant consequence of the weak euro is a strong increase in a company’s share price. With a price jump of more than 30 percent, Beiersdorf, along with Fresenius, was among the most successful DAX stocks this year.

But as quickly as share prices have gone up, the driver of profits will disappear into thin air the minute the weakness in the euro comes to an end. Investors got a taste of this after the meeting of the European Central Bank on Thursday, when the price of the euro went up by 3 cents.

Nevertheless, the prospects are still good for the fourth quarter, since the euro is still trading at about 10 percent lower than in the previous year. This will lead, once again, to profits based purely on the exchange rate.

Commerzbank has calculated this effect on company profits. Under the assumption that the dollar will gain 10 percent in value against the euro, companies listed on Germany’s blue-chip DAX index earn an additional €12 billion in earnings before interest, taxes and depreciation. This corresponds to a special profit of about 8 percent. Companies listed on the mid-cap MDAX index earn an additional €2 billion, boosting profits by 6 percent.

On that measure, Fresenius is not even one of the biggest beneficiaries – its pretax profit increases by an additional 5 percent when the dollar appreciates by 10 percent. A weak euro has an even stronger effect on the profits of fertilizer manufacturer K+S (20 percent), pharmaceutical giant Bayer (14 percent) and automaker BMW (11 percent). Among MDAX-listed companies, the weak euro translates into additional profits of up to 34 percent for companies including Krones, Rheinmetall and Lanxess.

This effect usually comes with rising stock prices, but not always. Specialty chemical producer Wacker Chemie is a case in point. It did see sales increase by 12 percent, to €4.1 billion. But the special revenues resulting from the weak euro only masked excess capacity and pricing pressure, especially in Wacker’s business with silicon, which the ailing solar industry needs but can hardly afford.

Adidas and Lufthansa are among the few euro losers. The sporting goods maker has most of its goods produced in Asia while generating a large percentage of its sales in Europe. This, conversely, drives up costs instead of lowering them.

Germany’s flaship airline Lufthansa is suffering because kerosene and new aircraft are paid for in dollars. However, the sharp decline in the oil price (40 percent in a year) has brought down kerosene prices, leaving the airline with a stronger profit in the end. In other words, one economic stimulus is offsetting the other.

For those companies that are benefiting from the weak euro, more advantages are in store.

“Products produced in Euroland become cheaper in the United States and Asia, and this makes them even more competitive, and this in turn means these will sell more and crowd out competitors,” predicted Markus Wallner of Commerzbank.

This applies, for example, to T-Mobile, the U.S. subsidiary of telecommunications giant Deutsche Telekom. One reason business is booming for Deutsche Telekom in the United States is that the Bonn-based group is obtaining competitive advantages over its bigger rival. But this dual effect cannot be calculated.

The upshot is that companies with strong business in the dollar zone, which also includes automakers BMW, Daimler and Volkswagen, benefit from the weak euro. However, the market also speculates on the future. The positive currency effect is reversed as soon as companies are compared with quarters in previous years in which the euro was even weaker.

Should the euro gain in strength again, the companies that benefit the most today will suffer the most in the future.

Ulf Sommer reports for Handelsblatt on companies and financial markets. To contact the author:

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