Kass: Don't Buy Big-Caps' Big Move Up

Foreign Exchange Benefits

Last week I spent some time on the telephone with CNBC's Steve Liesman analyzing the composition of first-quarter profits, stripping out the foreign exchange benefits. Specifically, we both did separate analyses of the role that a weakening U.S. dollar had on the positive translation of revenue and profits in the first quarter.

As of early last week, 18 Dow components had reported. Of these, two companies reported no impact from currency, one company reported a slightly negative impact and two did not reference foreign exchange -- 13 reported a positive impact of first-quarter results.

Of those 13 companies reporting a favorable foreign exchange translation benefit, on average currency benefits contributed more than 25% to the growth in sales year over year.

Currency gains/sales growth were as low as 7% of the revenue growth at American Express (AXP Quote), and more than 30% of the revenue growth at IBM (IBM Quote), Altria (MO Quote), DuPont (DD Quote) and Pfizer (PFE Quote). (Of all 18 reporting Dow components, foreign exchange contributed about 15% to quarterly sales growth.)

In the aggregate, the 18 companies reported a 9% rise in revenue from $231 billion in the first quarter of 2006 to $252.5 billion in the first quarter of 2007. That year-over-year gain of 9%, or $21.2 billion, beat analysts' consensus by $8.7 billion. However, a lower U.S. dollar produced a positive foreign exchange translation contribution of $3.45 billion to the sales growth, representing a sizable 40% of the $8.7 billion revenue beat. (Without the benefit of the lower U.S. dollar, sales growth would have been shaved by about 1.5% -- and would have recorded a 7.5% rate of growth.)