The PZ Cussons (LSE:PZC) share price was smashed in early February, dropping almost 20% in a week.
It’s a shock dive for the FTSE 250 shampoo, soaps and toiletries brand.
So what’s happened here and could this be a moment to snap up cheap shares?
Foreign exchange
A large proportion of PZ Cussons sales come from its business in Nigeria.
But the Nigerian currency, the Naira, has crashed over the last 12 months. It’s around 70% weaker than it was in February 2023.
And the country’s market regulator has now effectively devalued the currency by changing how it calculates the rate of exchange.
This means that foreign companies making sales in Naira find the funds they have are not worth as much in pounds or dollars as they were. These currency woes forced the Manchester company to take a whopping £88.2m loss.
Dividend cut
The PZ Cussons board said in a February trading update that it would need to cut its interim dividend by 44% to 1.5p.
Investors hate it when companies cut dividends. That’s because so many people rely on dividends for income in retirement.
And when companies lose that goodwill of their investors they can start to see confidence falter, with persistent share price weakness.
Still — can PZ Cussons stay in business? It’s very likely. This is a company making £55m of profit a year, after all. So it’s possible it could be a good stock to consider buying as a turnaround play.
Instability and uncertainty
PZ Cussons has known for a long time that currency instability could hurt its business.
This is also not a particularly streamlined company, with operations in Indonesia and Australia and New Zealand, as well as the UK and Europe.
The company is generating large revenues but has been forced to revise down its estimates.
Markets hate uncertainty. And when companies have to significantly cut their outlook for how much they’ll make, it forces investors to rip up their plans.
What I’d have made
I first looked at PZ Cussons as a potential buy and hold way back in 2011. That’s because it’s a brand with headquarters just down the road from where I live.
So what if I’d put £1,000 into the company back then when the shares were trading at around 360p? I’d have around 277 shares, which would only be worth £290 today, not including dividends.
And profit margins have been declining for the last couple of years, down from 12% to 9%. So even though sales are steady, the company is retaining less money from its trading.
The bottom line
My major concerns are the low return on capital, return on assets, and return on equity. These are measurements of how much a company gets back from the money it spends.
PZ Cussons is only producing returns in the low single-digits. This says to me that the company isn’t using its spare cash very effectively.
Even as a turnaround play, I think there are better stocks and funds on the FTSE 250.
Those I’ve written about for The Motley Fool recently include the TwentyFour Income Fund that pays 9.7% yield, or abrdn with an 8.6% yield.
With high-yield options everywhere I look, I don’t think PZ Cussons cuts the mustard.
