Looking for a silver lining in the carnage?
9 October 2008
Notwithstanding the carnage in the global stock markets these days, there is a silver lining for Canadian exporters with healthy gross margins. I’m referring to the depreciation of the Canadian $ against the U.S. $, due in large part to both the flight to the USD as a safeheaven in these turbulent times and the global run on commodities.
In just two weeks our CAD $ has gone from $0.9711 (Sept 25/08), to $0.8734 (today) against the USD. That’s more than a 10% decline/devaluation.
Many of our portfolio software companies have gross margins in excess of 90%, but let’s say for example you’re a high-value Canadian exporter with $10,000,000 USD of revenue (as all of your sales are into the U.S. market), with 60% gross margins. Today, your gross profit contribution on an annualized basis would be $690,000 (11%) higher than it was just 2 weeks ago. Put another way, for every decline of the CAD $ by $0.01, that’s an annualized gross profit increase of $80,000 that can be dropped to your EBITDA line, or invested back into the business.
It’s well documented that Canadian exporters have had a terrible go of it adjusting to the depreciating USD. If nothing else, it looks like at least over the near term their profitability will be improved all things being equal. Hopefully this will help lessen the blow of these choppy/uncertain times as everything else going on gets sorted out.
FMU
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2 Responses to “Looking for a silver lining in the carnage?”
October 9th, 2008 at 2:54 pm
True — but the effect (on many mid-sized companies especially) may not be immediate. Lots of them have done some currency hedging, and therefore will not benefit until the hedges come off.
October 9th, 2008 at 3:36 pm
Duncan – you are right but as a commercial banker, I was continually surprised by how few CFOs, CEOs and BoDs hedged out their gross margins – everyone seemed to be on “the dollar’s got to go lower” train. The train is finally in the station.