PM and Currency: Does it Matter?

Takeaway: PM is unique in our coverage, not because it has significant currency exposure (all multinationals do), but because it matters more for PM.

This note was originally published March 15, 2013 at 11:17 in Consumer Staples

The quick answer to our title question is either:

  1. No, not really, but....or...
  2. Yes, however...

Translation doesn't impact the value of a business, hyperinflationary events aside.  However, to the extent that multiple market participants make buy and sell decisions based on factors impacted by translation, the share price can certainly be impacted.  The difference between the two answers above is one of duration.  Longer-term, number one is the correct answer.

 

Philip Morris has no domestic U.S. business, a fact that makes it unique within our coverage universe. We tend not to get bent out of shape because of currency, preferring to look at revenue and EBIT trends on a currency neutral basis as we recognize that translation from one currency to the other at a point in time doesn't have any impact on the value of the business.  However, we also realize that optics do matter to the extent that machines (and people) purchase stocks based on positive EPS revisions, or accelerating revenue growth, or any of a number of factors that are impacted by translation.

 

PM is also unique in that, as a tobacco company, it aggressively returns cash to shareholders via dividends and share repurchases, both of which are dollar denominated.  So, to the extent cash generated by the business is actually translated into dollars, currency movements do matter, as well as the market's perception being altered by the impact of translation.  In the example of PG or KO, for example, domestic operations can partially fund dividends or share repurchases, and cash generated outside the U.S. can be reinvested in local currency assets.

 

So, while PM posted one of the more impressive quarters in staples in Q4, with both robust top line and the ability to leverage revenue growth with EBIT growth and has an attractive multiple compared with other, slower growth staples assets, the recent moves in the currency market are worrisome in terms of sentiment and represent a potential overhang on the share price relative to the balance of the staples group.

 

To that end, we have examined PM's performance in relation to the DXY (a basket of currencies) since 2007.  While the relationship has weakened in recent years, it is apparent that periods of "strong dollar" have, by and large, meant tough sledding for PM's share price.

 

PM and Currency: Does it Matter? - PM and DXY1

 

PM and Currency: Does it Matter? - PM and DXY2