The US dollar is stronger these days than it has been for a long time. Currently, the US reserve currency of 0.96 EUR is again as large as it was in December 2016. In this article I will show you the consequences of the strong dollar for many companies. First of all: American companies that import goods now have really good cards. Today I want to show you two companies that look interesting considering the strength of the dollar. But we will also see that such macro factors should never be the only reasons you invest.
General Motors on the electric car ride
Although the American automaker General Motors (NYSE: POC) lost its crown to Toyota for the first time, the company is a strong player in the industry. Nevertheless, GM reported solid results in its quarterly earnings report amid supply chain problems and inventory shortages.
The company is well positioned to navigate a rapidly changing environment. After all, the management around CEO Mary Barra aims to produce 400,000 clean electric cars in 2022 and 2023. A good sign I think.
The economic downturn may result in a small decline in global sales. But GM has a good chance of offsetting this problem thanks to the strengthened dollar. Why? It’s simple: General Motors manufactures its cars on the domestic market, but many of the components come from abroad. A stronger dollar means that these can be purchased at a competitive price. And that is what ends up increasing profits and offsetting the decline in vehicle exports.
The price-to-earnings ratio of 5.3 looks attractive (all data as of July 4, 2022). And the price-to-sale ratio of 0.4 and the price-to-book ratio of 0.8 are also low. But why should the market underestimate such a large and well-known company? There must be a catch here. And yes, it’s there.
You have to be really careful with the balance
General Motors’ books show significant debt risks. For example, current assets do not cover current liabilities. This is an alarm signal. And the cash flow from operations is currently barely enough to cover the debt.
For these basic reasons, I will stay away from GM stocks no matter how high the dollar goes.
It looks a little better for this industrial supplier
Original parts (NASDAQ: TSML) has a better foothold in the domestic US market thanks to the strong dollar, I think. Equivalent to Walmart (WKN: 860853) profit margins should be slightly improved on all items imported for sale in the United States. When we consider that 75% of original parts sales are made in the United States, the company has benefits.
In addition, the balance sheet looks much better than General Motors. At the current price-to-earnings ratio of 20.4, I see a slight underestimation. $ 190 per share is possible in the long run. Nevertheless, this stock is not in my portfolio either. In the current bear market, there are just too many better options.
As you can see, macro effects such as exchange rate developments in our analyzes can help us find interesting investments. But they should never be the sole basis for our decisions. Strong leadership and good growth opportunities are much more important to me.
What do you mean? What are you looking for in stock analysis? Let’s discuss it!
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Henning Lindhoff does not own any of the mentioned shares. The Motley Fool does not own any of the listed shares.