What Does the Bolivar Devaluation Mean for Staples? A Look at the Present through the Past (2010)

What's New?


Yesterday afternoon, the government of Venezuela announced that the fixed exchange rate would change from 4.30 bolivars to the dollar to 6.30.  The move was widely expected, even if the magnitude of the devaluation was unknown.

A number of companies across consumer staples have exposure to this event, and we attempt to provide investors some perspective based upon the prior 2010 devaluation (100% devaluation vs. nearly 50% yesterday).  The exposure is two-fold – the one-time revaluation of monetary assets in the country will result in a charge, and then an ongoing flow through the income statement where any income earned in Venezuela is translated back into fewer dollars.

A look back at 2010


Back in January of 2010, the Venezuelan government announced its decision to devalue its currency and the official exchange rate went from 2.15 to 2.60 for essential goods and to 4.30 for non-essential goods – the lower rate was abolished in December that same year.


What happened and to whom?


CL - took a significant charge ($271 million, or $0.53 per share) as a hyperinflationary transition charge in 2010, as well as the impact of bolivars translating back into fewer dollars flowing through the income statement.  The company also has a significant local currency asset position ($200 million as of end of year 2010).


ENR - took a $0.20 per share charge ($0.03 in ’11) for the devaluation, on an earnings base of $5.60.  The combination of the devaluation and economic conditions in Venezuela resulted in a $23.3 million reduction in net sales in ’11, on a base of approximately $4.25 billion.


AVP - took a $81.0 million charge to EBIT in ’10 (on a base of $705.5 million) as well as a $46.1 million charge in “Other expense, net”. Venezuela represents approximately 5% of AVP’s revenue and 8% of operating profit (first nine months of ’12).  Further, AVP had $223 million in cash balances denominated in bolivars (total cash on the balance sheet as of September 30, 2012 was $1,095.5 million).


KMB - took a $96 million charge in Q1 2010, net investment (as of year-end 2010) was $175 million.  Venezuela represented 1% of net revenues and 1% of EBIT.


GIS – (from 2010 10K) - “During fiscal 2010, Venezuela became a highly inflationary economy, which did not have a material impact on our results in fiscal 2011 or 2010.


K – (from 2010 10K) – “Venezuela represents only 1-2% of our business; therefore, any ongoing impact is expected to be immaterial.”

HNZ – (from 2010 10K) – net asset position of $81 million (subsequent to the 2010 devaluation) –“While our future operating results in Venezuela will be negatively impacted by the currency devaluation, we plan to take actions to help mitigate these efforts.  Accordingly, we do not expect the devaluation to have a material impact on our operating results going forward.”


KO – (from 2010 10K) – “During the first quarter of 2010 we recorded a loss of $103 million related to the remeasurement of our Venezuelan subsidiary’s net assets.”  As of December 31, 2011, the company’s Venezuelan subsidiary held monetary assets of $300 million.


PEP – (from 2010 10K) - “In 2010, our operations in Venezuela comprised 4% of our cash and cash equivalents balance and generated less than 1% of our net revenue”.

MJN – very small business there resulted in an $8.5 million loss over the initial balance sheet remeasurement.

In order to assess how the stocks might trade, we took a look at the absolute and relative performance of the names mentioned above versus the S&P 500 and the XLP Consumer Staples Index for the month before the devaluation (December 2009), the week before (devaluation occurred on January 8, 2010), the three weeks following (until February 1, 2010) and then the next month (from February 1 to March 1).  Both the prior month and week before saw meaningful underperformance versus the S&P, that was substantially made up (on average) in the three weeks following.

What Does the Bolivar Devaluation Mean for Staples? A Look at the Present through the Past (2010) - Venezuela Devaluation

It appears to us that the setup is a little different coming into this event, as the names mentioned above outperformed the S&P 500 by an average of 2.0% over the last month.  Also recognize that the magnitude of the devaluation is substantially less than 2010.


Bottom line for us is that the companies with significant exposure (AVP, CL, PEP, and KO) may see some very, very modest EPS weakness and almost certainly more significant one-time charges as a result of this event.


For those folks in the Northeast - happy and safe shoveling!




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst


The Economic Data calendar for the week of the 11th of February through the 15th is full of critical releases and events. Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.




Takeaway: Household growth in January vs the prior year decelerated by 84 bps sequentially. Is this a sign of slowing momentum?

This note was originally published February 08, 2013 at 11:28 in Financials

Household Formation Reflects Consumer Confidence

While the fiscal cliff didn't seem to deter people from forming households in December (December posted the strongest YoY growth since the upturn began), apparently the payroll tax hike did. 


The January monthly household formation data, a key leading indicator for housing, just became available on the Census Deptartment's website. On a year-over-year basis, household growth in January was +1.11%, a sequential deceleration from December's YoY growth rate of 1.95%, and the weakest one month print we've seen since the 3Q11 upturn began.


This is the most current data available, and has been a good leading indicator for the housing sector. Consider the sharp inflection in 3Q11 household formation trends, which preceded the actual turn in housing data and housing stocks that followed in October/November, 2011.


While a concern, we wouldn't get too worried about a single month's print, especially as January was lapping a tough comp. That said, we'll be keeping a close eye on February to see if this is indicative of an emerging trend.




Joshua Steiner, CFA



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Slowing Growth

Since we transitioned from #GrowthSlowing to #GrowthStabilizing back in November/December, things have been relatively uneventful as the Dow hit 14,000 and the S&P 500 climbed to 1500. Now, with Brent crude oil approaching $118 a barrel, we have to worry about consumption slowing which in turn slows growth. People paying $5 to $6 a gallon for gas start pinching pennies instead of going out to Applebee’s every night for dinner. Oil is a big headwind for global growth and we’ll have to see what it does over the next week in order to asses what happens next.

Heads Or Tales

This morning we had the pleasure of waking up to the EuroStoxx 50 breaking down on both a TRADE and TREND basis. It’s clear that much like America, the European political class is intent on screwing things up. Draghi wants to “jawbone the Euro back down” as Keith put it this morning and do the opposite of what helped Germany’s economy recover. Currency does have a positive correlation to growth expectations believe it or not; just look at Japan.

Asset Allocation


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We believe ASCA will receive a higher bid from another gaming competitor. Our valuation puts ASCA’s worth closer to $40.


With FedEx Express margins at a 30+ year low and 4-7 percentage points behind competitors, the opportunity for effective cost reductions appears significant. FedEx Ground is using its structural advantages to take market share from UPS. FDX competes in a highly consolidated industry with rational pricing. Both the Ground and Express divisions could be separately worth more than FDX’s current market value, in our view.


HOLX remains one of our favorite longer-term fundamental growth companies given growing penetration of its 3D Tomo platform and high leverage to the 2014 Insurance Expansion from the Affordable Care Act.

Three for the Road


“Final paper on the table. "It's the Final Countdown", as Europe would sing. #EUCO #MFF” -@alexstubb


“I quit therapy because my analyst was trying to help me behind my back.” -Richard Lewis


Canadian International Merchandise Trade (CAD) (Dec) -0.90bln vs. Exp. -1.45bln (Prev. -1.96bln, Rev. -1.67bln)

PM – Hard to Poke Holes in the Quarter

PM put up a solid print yesterday - here's what we liked

Constant currency organic revenue growth accelerated to 6.8% in the quarter versus a reasonably difficulty comparison (+8.2%) in the year ago.  Even better, we saw that top line strength leveraged into +12.3% currency-neutral operating income growth, an enviable result versus the balance of the consumer staples names that have reported thus far.  The company exceeded our volume estimate, posting volume growth of 2.7%, with strength in the Eastern Europe, Middle East and Africa region (+7.1%), as well as the Asia region (+5.7%)  – meaningful reacceleration of the volume momentum in both regions.

EPS exceed consensus by $0.02 in the quarter, but guided below consensus (range of $5.68 to $5.78) versus consensus of $5.79 (we are at $5.71, but still see some risk to that number as the yen continues its downward spiral.

We need to see consensus move down closer to our estimate (it should) given the company’s commentary yesterday in order for us to get more constructive on the name.  We prefer to have a positive bias on names with a clear path to EPS upside (CAG, for example).

Having said that, PM’s results in the quarter shame a number of other large cap staples names whose multiples exceed that of PM (in some cases by a 1 or 2 P/E turns).  If only PM shipped diapers instead of cigarettes…


Call with questions,




Robert  Campagnino

Managing Director




Matthew Hedrick

Senior Analyst

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