Tech investors, are you feeling the draft on your back? Perhaps it's just those fashionably low-slung jeans but, depending on what you're invested in, you may be more exposed than you realize.
What we're looking for
Technology companies that earn revenues pay costs or report earnings in different currencies, which heightens their sensitivity to changes in foreign exchange rates. The U.S. dollar is at a five-month low against the euro and has lost about 12 per cent against the Canadian dollar in the past 11 months.
What we found
Some companies, such as CGI Group Inc., earn a substantial portion of their revenues in U.S. dollars and report earnings in Canadian dollars, according to the tech stock analysts at TD Newcrest. To protect themselves, these companies use forward contracts to hedge against foreign-exchange movements.
Others, such as Bridgewater Systems Corp. and Sandvine Corp., obtain as much as 90 per cent of their revenue in U.S. dollars and report in Canadian dollars, without putting in place currency hedges.
"For Canadian dollar issuers, declines in the U.S. dollar pinch revenue," analyst Scott Penner wrote in a research report. "The earnings squeeze is most acute for small caps - Absolute, Bridgewater, Redknee, RuggedCom and Sandvine top the list. These are the names with the biggest mismatches, usually between Canadian and U.S. dollar exposures."
Mr. Penner also analyzed revenues and expenses against the backdrop of a rising euro.
"Open Text and Aastra are among the companies where revenue benefits from the rising euro. Others of note include Descartes, 20-20 and MKS. Aastra clearly has the highest top-line exposure, but its benefit will be in future quarters and less so in the first quarter," he said.
Open Text might be in a stronger position than investors think, Mr. Penner said.
"The company books the majority of its quarterly revenue in the last month of the quarter; revenue and expenses are translated at a monthly average rate; and the March [euro v. U.S. dollar]is 6-per-cent higher than the December average rate."
He also considers the impact of a strong loonie on tech companies' acquisition ambitions.
"A stronger Canadian dollar is a boon for acquisitions. Names that we believe the market sees as successful consolidators are CGI Group, Enghouse, Open Text, Constellation, Descartes, and Exfo. These stocks have additional purchasing power with the rise in the Canadian dollar."
Sonali Verma