On Friday the US Commerce Department announced that the American economy had expanded by the fastest pace in two years over the third-quarter of 2013. Gross domestic product (GDP) of the United States is now increasing at an annual pace of 4.1%, driven primarily by a pick-up in consumer spending. Meanwhile, Australia’s GDP is on track to record only 2.4% growth this year and is not forecast to rise much over the next two to three years.
When looking for companies to invest in, potential shareholders should consider whether a subdued Australian economy is likely to have an adverse effect on the earnings of domestic companies. Conversely, if the US economy is likely to grow at a faster pace, could the earnings of Australian companies be positively impacted?
At the same time, the Australian Dollar is nearly at a three-year low against the US dollar. This makes companies that rely on importing goods less profitable, while companies that are net exporters or derive a substantial proportion of income from outside Australia more profitable.
Examples of such companies are Australia’s big miners BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO), or building product suppliers such as James Hardie Industries (ASX: JHX). While these are good companies, they each have business models that rely heavily on cyclical demand.
To this Foolish investor, there are three companies on the ASX that stand out as having strong management, a good history of shareholder returns and derive a substantial proportion of earnings from outside Australia.
Global food, healthcare and tobacco packaging company Amcor (ASX: AMC) now derives over 90% of earnings from outside Australia following the recent demerger of Australasia-focused Orora (ASX: ORA). Amcor has delivered shareholder returns in excess of 200% since 2009 and the strong management team has hit performance targets to grow the company organically and through acquisitions. Amcor’s balance sheet is also healthy and achieves margins above the median of its peers. Amcor’s exposure to the US healthcare and food markets will be a plus in coming years if the American economy continues to improve.
Blood plasma product group CSL Limited (ASX: CSL) develops treatments for a range of rare medical conditions that affect the human immune system. CSL has a reputation for high-quality and innovative products, delivered at low cost (to the company) to developed countries with aging populations. CSL derives nearly 70% of revenue from North America and Europe, has very little debt, long-term successful management and pays out up to 50% of earnings as dividends. Consequently, the company’s share price is up 25% this year and 115% over five years.
Also in the healthcare field is ResMed Inc (ASX: RMD). ResMed develops devices to treat sleep apnea and develops marketing and advertising to increase awareness (and thus sales) about the dangers of the condition. Sleep apnea involves the shutting of vital airways during sleep which can lead to death in the worst cases. ResMed’s devices prevent the airways from becoming blocked and analysts are tipping that a new device should be launched by the company in 2014, which should provide a nice boost to earnings. ResMed also derives around 95% of sales from outside Australia and has a long-term track record of outperformance versus peers and the market.
The three companies above have outperformed peers and the general market over a number of years because of strong management, continued innovation and market dominance. The lower Australian dollar will act as a tailwind to strong companies like these. Especially if it remains below 90 cents over the medium term.
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*Returns as of February 15th 2021
Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.
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