Euro Pain Hits Stocks, But U.S. Multinationals Want the Last Laugh

Source: Eric Chan via Flickr.

The stock market opened sharply lower on Tuesday, with the Dow Jones Industrials falling almost 200 points as of 11:20 a.m. EDT and other major-market benchmarks falling in the neighborhood of 1%. Many market participants observed a near-panic about the potential for the deteriorating financial situation in Europe to have a cataclysmic impact on the eurozone's common currency, especially as the euro plunged to its lowest level in more than a decade and approached parity with the U.S. dollar. Yet even as some investors worry about Europe's ongoing issues with Greece and what a Greek exit from the euro would mean for the currency markets, an increasing number of U.S. multinational corporations are looking to protect themselves and even take advantage of a rising dollar.

Source: European Union.

What the falling euro means for stocksTypically, multinationals get hit when the U.S. dollar is strong. This is because these companies can't simply boost their prices in foreign-currency terms to reflect the strong dollar without jeopardizing their competitive position in their markets abroad. Therefore, companies tend to absorb at least part of the currency hit, which reduces revenue and profit in U.S. dollar terms, leading to slower growth or even reductions in sales and net income.

But recently, some multinationals have looked at strategies that could shelter them from a falling dollar. Late last month, Dow component Coca-Cola offered 8.5 billion euros worth of euro-denominated bonds, with maturities ranging from two to 20 years. That was the largest amount ever offered in euro-bonds by a U.S. company. Numerous other companies had made smaller offerings, including soon-to-be-ex Dow memberAT&T and online travel giant Priceline Group .

Image source: European Central Bank.

The trend has strengthened this month. Even Warren Buffett has gotten in on the action, with Berkshire Hathaway selling 3 billion euros' worth of bonds with maturities of eight to 20 years.

Companies reap a couple advantages by selling debt in euros. First, rates are lower in Europe than in the U.S., so the net borrowing costs are lower than if these companies sold dollar-denominated bonds. In addition, companies that believe the euro will keep falling hope to pay off these bonds with even cheaper euros down the road, essentially taking a speculative currency position. If the European currency bounces back sharply, then many companies will wish they hadn't been in such a rush to issue debt in euros.

For multinationals, though, offering euro-bonds also has a currency-hedging element. Coca-Cola, for instance, can count on an ongoing stream of revenue in euros in the future. By borrowing in euros now, the company can lock in today's exchange rates and then decide later whether to repay those bonds with its future euro-revenue. The net impact should reduce the negative effect a weak euro has had on earnings.

In the global economy, Europe will keep having an impact on the U.S., and the way companies are responding by issuing debt is just one element of how interconnected global markets are right now. Investors should keep their eyes on Europe even as U.S. stocks continue to celebrate six years (and counting) of bull-market gains.

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Dan Caplinger owns shares of Berkshire Hathaway and Priceline Group. The Motley Fool recommends Berkshire Hathaway, Coca-Cola, and Priceline Group. The Motley Fool owns shares of Berkshire Hathaway and Priceline Group and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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