How the falling dollar is sending CSL Limited & Cochlear Limited to record highs

The Australian dollar has weakened over the last week making 2018 lows of 75.32 US cents during Friday’s trading session. These are levels not seen since December as the strength in the US dollar is underpinned by rising interest rates that have resulted in 10-year US Treasury yields climbing over the 3% barrier for the first time since late 2013.

Offshore earners rise 

The weakness in the Australian dollar has seen Australian listed companies with significant earnings in US dollars rise to all-time highs over the last couple of trading sessions. A falling Australian dollar makes the offshore earnings of these companies more valuable when they are converted back into Australian dollars.

Biotechnology company CSL Limited (ASX: CSL) rose over 6% last week despite no material announcements being made. Approximately 47% of CSL’s operating revenues are generated in the United States. The company’s share price hit a new all-time high of $172.05 today, bringing the 2018 gains to 21% after it delivered another exceptional half-year profit result in February following strong performance in specialty products and from Seqirus.

CSL’s market capitalisation of $77 billion surpassed the market capitalisation of Australia and New Zealand Banking Group (ASX: ANZ) in morning trade today, making it the fifth-largest company listed on the Australian market. However, at current prices CSL is expensive as it trades for 36 times estimated FY18 earnings.

Another stock which has risen from the recent Australian dollar decline is Cochlear Limited  (ASX: COH). Cochlear generates around 50% of segment revenues in the Americas region. The hearing devices manufacturer hit a new all-time high of $195 during Friday’s trading session before falling to currently trade at $194.56. The company’s share price has now increased by 13% in 2018 as it continues to outperform the general market.

Management has forecast for FY18 net profit to be between $240-$250 million at a weighted average AUD/USD exchange rate of ~79 cents. A depreciating dollar could help the company’s full year results exceed the upper range of management’s outlook. At current prices, Cochlear is trading at 45 times estimated FY18 earnings, which is expensive as the market prices in a hefty valuation premium.

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Motley Fool contributor Tim Katavic owns shares of CSL Limited. The Motley Fool Australia has recommended Cochlear Ltd. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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