Rising Opportunities from a Falling Pound
02/11/2009 11:27 am EST
Peter Shearlock, contributor to the IRS Report, sees a chance to pick up bargains as the pound slides.
The pound’s sharp fall against other leading currencies has prompted doom-mongering headlines such as “Bust Britain!” and cynical sniping from assorted gurus and hedge fund managers.
But for many of Britain’s biggest companies, the turnaround in sterling’s fortunes after a prolonged period of strength is a godsend. Against the dollar, the pound has fallen by nearly a third since the start of last year and recently touched a 23-year low of $1.35.
For translation purposes, firms take average rates over three months, six months, or a year to work through to company profits. Any company with a calendar year-end using the average £/$ rate for the whole of 2008 would still be translating its dollar profits at around $1.85 to the pound.
The average for 2009 to date is close to $1.48. The big impact will come in 2009. One might have expected the share prices of the main beneficiaries—companies with the majority of their business overseas or operating in dollar-based commodities—to have [reflected that in their share prices]. Some have, but many have not, which presents an opportunity for investors during the depressed market.
One of the biggest gainers is mobile telecom giant Vodafone (NYSE: VOD), which earns just short of 90% of its profits overseas. Poor performances from the UK and Turkish operations and a slowdown in India, where the company recently made a big acquisition, have tempered enthusiasm for the shares. Even so, the upward trend in profits remains intact.
Vodafone’s financial year runs to end-March, and analysts predict a rise in earnings per share from 12.5 pence to 13.6 pence. Following the rapid fall in the pound over the past month, those earnings estimates will need revising. [Last] November, Vodafone said its full-year guidance was predicated on average currency rates for the second half of $1.67 and €1.26 to the pound.
Unless there is a remarkable rally in sterling over the next two months, the average rates for the half year are unlikely to be much above $1.57 and €1.16. That would be worth an extra £400 million in operating profit, currently targeted to be between £11 billion and £11.5 billion for the year.
At 137 pence, Vodafone is capitalized at around £71 billion. With net debt of £28 billion, that makes an enterprise value of £100 billion. Its 45% stake in the US mobile business, Verizon Wireless, was recently estimated to be worth £30 billion or more. Verizon (NYSE: VZ), which owns the other 55%, is on record as wanting to acquire Vodafone’s stake. A deal would more than wipe out Vodafone’s debt. The shares look attractive on a number of grounds.