L'oreal, Bayer see profits from euro below $1.32

L'Oreal SA Chief Financial Officer Christian Mulliez told analysts last month there's one guaranteed earnings driver for the world's largest cosmetics maker this year: the euro.

"There may be some negative factors, factors that we can't quantify today," he said on a Feb. 12 conference call. "But we know that we have at least one positive upside, which is that of the currency hedges," he said, referring to contracts that lock in costs and sales at a predetermined exchange rate.

Europe's biggest companies are betting a second year of recession in the region will drive down the common currency, helping them better compete as countries from Japan to the U.S. battle for exports. L'Oreal is hedging at $1.26 per euro this year, down from $1.36 in 2012. Bayer AG (BAYN), BASF SE (BAS), Heineken NV, Deutsche Telekom AG (DTE), MTU Aero Engines, Infineon Technologies AG (IFX) and Beiersdorf AG predict exchange rates ranging from $1.25 to $1.31, compared with the $1.3193 the euro closed at on Dec. 31.

"Given the region's growth outlook, Europe, more than most, needs a weaker currency," said Adrian Owens, a money manager who helps oversee $48 billion at GAM UK Ltd. in London. "We are now seeing a much clearer recovery in the U.S. We are running a short position on the euro against the dollar." A short position is a bet that an asset will fall in value.

European Aeronautic Defence & Space Co., the parent company of Airbus SAS, bought $30 billion in new hedges throughout last year, locking in an average rate of $1.30 to the euro to protect the future revenues for its commercial aircraft, helicopters and satellites.

"We've taken advantage of a more favorable U.S. dollar environment, accelerating our hedging speed in 2012," EADS Chief Financial Officer Harald Wilhelm told analysts last week.

Almost all of the 588 Airbus planes the company delivered last year were paid for in dollars, with more than 50 percent of costs incurred in euros. Every 10-cent drop in the value of the dollar against the euro costs the company about 1 billion euros ($1.3 billion) in pretax profit, EADS calculates.

Instead of falling amid the region's debt crisis and slowing economy, the euro has climbed from a two-year low of $1.2043 on July 24 to $1.3063 as of 3:30 p.m. in Tokyo after European Central Bank President Mario Draghi's pledged to do "whatever it takes" to preserve the 17nation currency bloc. The ECB has also avoided debasing the euro through bond purchases, unlike in the U.S., Japan and U.K. Since it began trading in 1999, the euro has fallen as low as 82.30 cents in October 2000 and risen as high as $1.6038 in July 2008. It ranged from $1.204 to $1.349 in 2012.

The median estimate strategists and economists surveyed by Bloomberg is for the euro to trade at $1.30 by year-end and $1.27 in 2014.

Output in the euro-area will shrink for two-consecutive years for the first time since the common currency was introduced, the European Commission predicted on Feb. 22, scrapping an earlier growth forecast. The median estimate in a Bloomberg survey is for the economy to contract 0.1 percent in 2013, compared with 1.8 percent growth in the U.S. and 1 percent expansion in Japan.