The Federal Reserve's decision to finally raise U.S. interest rates on Dec. 16 pummelled the already-on-the-ropes Canadian dollar to the lowest it's been in 11 years. Since the start of 2013, when both dollars were at parity, the loonie has been steadily falling and has now lost about 25% of its value against the greenback. The trend is unlikely to change for the foreseeable future.
However, the erosion of the Canadian dollar, especially against its U.S. counterpart, is good for some Canadian companies. These companies have strong U.S. operations that generate large portions of their revenues and profits in U.S. dollars while reporting results in Canadian dollars.
By owning companies whose bottom lines benefit from a lower loonie, investors can play this currency weakness to their advantage. Select high-quality Canadian companies, with strong fundamentals and a healthy revenue and share-price exposure to the U.S. dollar stand to benefit from the tailwind created by a sliding Canadian dollar, according to Morningstar equity research.
| Manulife Financial Corp. | ||
| Ticker | MFC | |
| Current yield | 3.1% | |
| Forward P/E | 10.1 | |
| Price | $20.94 | |
| Fair value | $22 | |
| Data as of Dec. 21, 2015 | ||
The largest Canadian life insurer by market capitalization, 
Manulife (MFC) provides insurance and wealth management products and services to individuals and institutions in Canada, the United States and Asia. The company is heavily exposed to the U.S. dollar through its American subsidiary, John Hancock, which contributes substantially to the company's consolidated balance sheet. Manulife's U.S. dollar-denominated earnings are converted back to the Canadian dollar for reporting purposes, which generates extra dollars when the loonie is lower.
The company reported $870 million in core operating earnings in the third quarter, a 15% jump year-over-year.
"From an operational perspective, Manulife remains fundamentally solid with sales continuing to show momentum across most regions," said Morningstar equity analyst Vincent Lui, who pegged the stock's fair value at $22.
Manulife clocked an 18% year-over-year increase in insurance sales, leading to a 31% jump in insurance sales through the first nine months, according to a Morningstar equity report. The insurer's asset management division experienced similar growth, with asset flows more than doubling to $1.4 billion.
Lui forecasted a revenue compound annual growth rate of 3% with an average return on equity of 13% through 2017.
| Imperial Oil Ltd. | ||
| Ticker | IMO | |
| Current yield | 1.1% | |
| Forward P/E | 18.7 | |
| Price | $43.12 | |
| Fair value | $43 | |
| Data as of Dec. 21, 2015 | ||
Imperial Oil (IMO) is a Canadian integrated energy company that explores, produces and sells crude oil and natural gas. It also operates three refineries in Canada, manufactures chemicals, and operates a retail fuel marketing business. The company is 70% owned by U.S.-based oil and gas giant ExxonMobil (XOM). The depreciation of the Canadian dollar results in stronger earnings for Imperial as its revenues are in U.S. dollars while operating costs are in Canadian dollars.
The company reported a strong third quarter production growth and managed to generate free cash flow after dividends. Calling this a "rare feat," a Morningstar report noted that the firm has a history of generating superior returns on invested capital relative to its peers.
Strong production growth, lower capital expenditures and cost savings helped Imperial produce free cash flow of almost $350 million during the third quarter, said Stephen Simko, sector director at Morningstar who pegged the stock's fair value at $43.
Imperial's industry-leading return on invested capital (ROIC) averaged 14% from 2011 to 2014, well above the 11% peer group average, but Simko expects it to fall to the 5% to 8% range over the 2015-19 period, driven by a low oil price environment.
| Gildan Activewear Inc. | ||
| Ticker | GIL | |
| Current yield | 0.62% | |
| Forward P/E | 14.0 | |
| Price | $39.68 | |
| Fair value | $44 | |
| Data as of Dec. 21, 2015 | ||
Canadian apparel company Gildan Activewear (GIL) manufactures and markets T-shirts, sports shirts, socks and sweatshirts in the United States, Canada and other countries. It also operates large-scale manufacturing facilities in Central America and the Caribbean. Gildan has more than a 70% printwear market share in the U.S., which generates a large portion of its earnings in U.S. dollars.
The company can gain additional U.S. printwear market share through acquisition, new products and increasing its international presence, says a Morningstar equity report. "Licensing arrangements and increased shelf space and sell-through of Gildan-branded underwear and activewear and Gold Toe socks could give the company a line of double-digit revenue growth," said the report.
Morningstar equity analyst Bridget Weishaar forecasted 11% revenue growth for Gildan in 2015, along with 8% average annual revenue growth and 18% average annual operating income growth over the next five years.
The firm's operating margins, she added, will expand over the five-year period to 19.7% from 12.6%, resulting from $100 million in savings from cost reductions, branded apparel sales, and higher-margin products. Weishaar recently increased the stock's fair value to $44 from $43, spurred by the falling Canadian dollar.
| Agrium Inc. | ||
| Ticker | AGU | |
| Current yield | 3.34% | |
| Forward P/E | 12.1 | |
| Price | $124.72 | |
| Fair value | $137 | |
| Data as of Dec. 21, 2015 | ||
Agrium (AGU) is the largest agricultural retailer in the United States. It sells fertilizers, crop chemicals and seed directly to farm customers. The firm's wholesale business produces and markets crop nutrients like nitrogen, potash and phosphate, with natural resources located on both sides of the border. A weak Canadian dollar provides additional revenue boost as a sizeable portion of Agrium's revenues is generated in the U.S., while the majority of its production costs are in Canadian dollar.
The fertilizer producer is aggressively acquiring retailers and farm stores to expand its business, particularly in the U.S. A wider footprint will increase Agrium's bargaining power with suppliers and create steady cash flows, according to a Morningstar equity report.
Defying the sector trend of weaker earnings, Agrium recently reported third-quarter profit of nearly 9% and net earnings of US$99 million, boosted by higher sales volumes and lower costs.
Morningstar equity analyst Jeffrey Stafford noted that the approval by Agrium's board of the expansion of its Saskatchewan-based Vanscoy mine will increase annual potash production capacity by about 50%.
Agrium is the third-largest potash producer in North America, and the oligopolistic potash industry has historically benefited from such production decisions, added Stafford, who put the stock's fair value at $137 and projected mid-single-digit organic sales growth on average through 2019.
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