SLIDESHOW: Stocks For Weak Yen at 120
Sunday night, the global strategy team at Credit Suisse released a note highlighting a whole a basket of stocks for the recent move higher in the yen, and for what they see as the next large leg in a secular devaluation of the currency.
The note followed the bank's core view that they see the USD/JPY rate rising to 120 in 12-months.
The bank reiterated its USD/JPY forecast at 120 for the next 12 months, although they noted that "recent events have skewed the risk lower" for a slightly lower target. Nevertheless, they evaluate the impact of the weaker yen and strong dollar on several companies, not just in terms of currency conversion effects but also on demand and gross revenue effects.
"Japanese corporates have benefits to reap both from enhanced competitiveness and stronger domestic demand," they wrote. "In typical fashion, many analysts have been quick to price in the obvious translational impact of currency moves but are, we believe, conservative in assumptions of volume growth – positive or negative."
"We flag the typical relationships and pair trades that emerge around the fortunes of currency shifts. Despite protestations to the contrary, it has not proved that different this time and it is a brave man who would stand in the way of the typical axes surrounding the manufacturing sectors and markets around which yen moves have traded in the past."
Notably, they highlight that the Japanese resurgence is bearish for emerging markets. "There is a fundamental challenge for the embattled emerging markets here."
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Toyota Motors (NYSE: TM) should benefit from a devaluation in the yen according to CS, not just from currency affects though. In fact, currency benefits may be overestimated for the automaker.
"Expect them to to continue with their practice of using FX-fuelled [sic] profits to fund increased product content, however the actions taken to mitigate pressure from a strong currency (moving sourcing base ex-Japan) will blunt the benefit of a weak currency."
Therefore, expect more investment in R&D as the company sees FX benefits, which could lead to future profits.
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"Japanese OEMs do have a long history of gaining market share at the expense of the 'big three' domestic US automakers."
However, they see the risk as less so than in the past as the big three have become much leaner post-2009 and have become better adapted to the modern market full of foreign competition.
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On Caterpillar, they expect a negative impact as Caterpillar has "low profit margins, therefore a high risk of negative operational leverage from top-line market share losses to the Japanese."
They also note that Caterpillar is "at risk of weaker competitive positioning with the Yen at 120/$ and 2014 earnings could be negatively impacted by approximately 5%."
Meanwhile, on Deere, they see a "risk of weaker competitive positioning with the Yen at 120/$ and 2014 earnings could be negatively impacted by approximately 2%."
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General Electric (NYSE: GM) should also be hurt from the yen devaluation, according to CS.
However, they note that the diversification amongst the businesses should mitigate impacts.
"Japanese companies compete in healthcare, power, automation and machine tools with conglomerates, though EPS impacts are diluted by portfolio of businesses."
Thus, they see little impact to EPS although there could be a shift of revenue geographically as Japanese domestics take back market share.
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Credit Suisse said that the two are "not beneficiaries but are least affected and have underperformed. They should fare better against the global sector than they have."
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Micron Technology (NASDAQ: MU) could benefit from a yen devaluation as it saves the company roughly $500 million less hedge off-sets on the Elpida acquisition price, which was announced at 200 billion yen when the USD/JPY was at 80.
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Sony (NYSE: SNE) should benefit from a yen devaluation according to the analysts due to currency translation affects but also from cost savings resulting from the currency moves.
CS notes that as the yen weakens, Sony gains market share in televisions, which means about a 5-7 percent in the fixed cost structure since the yen began devaluing to date.
As the yen further devalues, they see further downside to costs as well as market share gains.
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Sandisk (NASDAQ: SNDK) is expected to reap rewards from a yen devaluation as most of its cost of goods sold (COGS) are priced to yen, meaning that it saves in dollar terms as the yen weakens.
Analyst John Pitzer notes that "75-80% of product COGS are priced in Yen."
Further, he notes that the company has a "2.2% sensitivity in operating profit to ¥1 depreciation. The Company expects CY13 [Gross Margins] to increase 800-1000bps q/q partially on improved yen rates."
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Hewlett-Packard (NYSE: HPQ), Lexmark International (NYSE: LXK), and Xerox (NYSE: XRX) are all expected to be negatively impacted by a yen devaluation due to increased competition from domestic Japanese firms.
"Decline in Yen affecting the competitive positioning and pricing of competitors (Ricoh, Canon, Brother) biggest concern here," said analyst Kublinder Garcha.
However, Garcha noted that "the direct risk (i.e. translation that impacts revenues)" to the three companies was "not as much since the exposure to Japanese markets is minimal."
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Lastly, Credit Suisse sees negative affects for Nokia (NYSE: NOK) during a yen devaluation.
The effect will likely be small net impact on EBIT and profit margins.
A "further 20% depreciation could have around 1.5% of positive impact on GM structure of D&S business and 2-3% of negative impact on EBIT margins for NSN (assuming the Japanese cost exposure to be around 10% for D&S and the Japanese revenue exposure for NSN to be 16%)."
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