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Canadian dollars

Jeff McIntosh/THE CANADIAN PRESS

The Canadian dollar is starting to look like a crippled loonie, falling to its lowest level in nearly two years in Tuesday trading.

But the struggling currency has a silver lining for investors: Some companies stand to reap windfall gains as the dollar falls.

A weaker dollar makes businesses that receive export proceeds valued in U.S. dollars more profitable. Firms with U.S. assets see their value pop when converted back into Canadian funds.

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In addition, there's a general economic effect. The Canadian dollar is falling because the U.S. economy is getting stronger, a plus for domestic businesses, given the integration of the North American economy.

Analysts at National Bank have compiled a list of more than a dozen companies that could benefit from a weaker dollar. They include Toronto-Dominion Bank, Sun Life Financial Inc., Manulife Financial Corp., Agrium Inc., Saputo Inc., Alimentation Couche-Tard Inc., Kirkland Lake Gold Inc. and Teck Resources Ltd., among others.

National Bank expects the loonie, now around 95 cents (U.S.) to stay in that area over the coming year, a distinct step down from the near-parity levels that have prevailed over the past three years.

Given the currency weakness, the value of the dollar "will be a more important metric to consider in company earnings analysis," says Stéfane Marion, chief economist and strategist at the bank, in a recent note to clients.

The bank doesn't expect the currency to collapse, and believes the dollar will do well against other commodity currencies, given that Canada's exports are levered to the U.S. recovery and that Canada enjoys a triple A fiscal position.

In the agricultural sector, the bank says Ag Growth International Inc., a maker of grain-handling equipment, could post a 6-per-cent rise in earnings per share while fertilizer producer Agrium Inc. may enjoy a 4-per-cent increase due to the weaker dollar.

However, one worry for agricultural companies is that a stronger U.S. dollar would likely put downward pressure on grain prices, "contributing to an offsetting … headwind that is challenging to quantify," according to the bank.

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The bank's financial services analyst, Peter Routledge, said Sun Life, TD and Manulife "have the most positive gearing to a rising U.S. dollar."

Sun Life benefits because it owns MFS, a large, U.S.-based asset management company, while Manulife gets a boost from its ownership of John Hancock, its U.S. insurance subsidiary that makes up about half of the company's consolidated balance sheet.

Both Sun Life and Manulife would "be good buys if one sought to take a position on a strengthening economic environment in the United States," Mr. Routledge said.

TD similarly benefits because of its large ownership stake in U.S. discount stock broker TD Ameritrade. If the Canadian dollar falls and interest rates rise simultaneously, TD "appears to be the best positioned, amongst large-cap Canadian financial services companies," Mr. Routledge said, pointing out that the bank has a larger branch network in the U.S. than in Canada and has committed more than 30 per cent of its balance sheets to assets located south of the border.

Among merchandising and consumer product companies, T-shirt maker Gildan Activewear Inc. will be a beneficiary, even though it reports results in U.S. dollars. About 90 per cent of its total earnings come from its U.S. operations, the bank said.

At cheese-maker Saputo, U.S. operations account for about half of total earnings. Because the company reports in Canadian dollars, it will get an earnings pickup of about 2 to 3 per cent due to its U.S. exposure.

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Alimentation Couche-Tard also benefits because it has 45 per cent of earnings from U.S. sources.

In the mining industry, Canadian companies will benefit from a weaker loonie, but there is a downside. A rising U.S. currency is usually associated with commodity price weakness.

"Weaker commodity prices would dampen the benefit of a weaker functional currency; nevertheless, Canadian-based companies with Canadian dollar costs remain poised to outperform U.S.-based producers in the short term," the bank said.

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