View from City Road: Don't write off the US earners

THE FALL in the value of the US dollar is worrying, but not that worrying. While it is damaging for British companies, it is probably not as bad as the stock market's reaction suggested in the wake of Grand Metropolitan's profit warning.

Though North America accounts for a large chunk of the pre-tax profits of quoted UK companies, it is not clear exactly how much. Nor does it follow that UK companies with US businesses are all affected by the dollar's weakness in the same way; there are even some beneficiaries. And some of the worst affected have no US operations at all.

Confused? If so, you are in good company. Even large securities houses cannot agree on how much profit UK companies make in the US. UBS Phillips & Drew says North America accounts for 14 per cent of the pre-tax total, while Hoare Govett says it is 20 per cent. The wide discrepancy is easily explained.

Both firms have had to make large assumptions to arrive at their figures. Most companies reveal how much of their operating profits they earn in the US, but few give a geographical breakdown at the pre-tax level. Hanson earns a large chunk of its operating profits in the US, but because its borrowings are over there and its cash over here the US accounts for a far smaller proportion of its profits after interest.

Tomkins probably makes about 70 per cent of its operating profits in the US, but far from losing out from the near 20-per cent fall in the value of the dollar over the last year it is gaining. Almost a year ago it locked into the dollar at dollars 1.76, which looks attractive now.

Translated US earnings will be lower, especially at companies such as Smith Industries which use year-end rates, but this should not necessarily affect their dividend- paying ability.

Exporters to the US are worse off as a result of the dollar's weakness but exports from the UK account for only 4 per cent of the profits of quoted companies.

Some of the damage to UK companies is from US exporters. European chemical companies are experiencing competition from American companies for the first time. Paper manufacturers are similarly affected. The potential for exporting from the US is one reason for not writing off dollar earners. Another is that they are benefiting from low interest rates and a patchily reviving economy. Their shares might even be worth buying once the dollar stops falling.